Finance Solution for Capital Asset Pricing Model Task
- 24th Nov, 2022
- 18:07 PM
Que A: Appraise the multifactor model of asset returns and explain the advantage of such a model in relation to the Capital Asset Pricing Model (CAPM). Provide two implications of the multifactor model in professional asset management.
Ans: The Capital Asset Pricing Model (CAPM) is a single-factor model which attributes portfolio performance to the market return. A multi-factor model may involve not only the market factors but also econometric, fundamental or statistical factors.
- It is a simple model and assumes that the investor holds a diversified portfolio, which eliminates the idiosyncratic risk to some extent.
- It considers the systematic risk, which is left out of other models such as the dividend discount model.
- The CAPM model helps determine if the securities are undervalued or overvalued. If the security is giving a return of more than its required rate of return, it is undervalued and should be bought.
- If security is giving a return less than its required rate of return, it is overvalued and should be sold.
Que B: Suggest two (2) factors that are likely to drive Bitcoin valuation. Discuss reasons for your suggestion.
Political Risk: Political risk is the national currency all over the world effect of the price of bitcoin and it is used to move a large amount over the world. Sometimes if any country's currency's price increase then it affects the opposite of bitcoin, as a result, bitcoin price increase and sometimes it has seen differently if any country's currency price increase then bitcoin value decrease. after Britain left the European Union (Brexit) on June 23, 2016, the bitcoin value increased in 2016 and the British pound value decreased this is the best reason for Political decisions after the value of bitcoin.
Regulatory Moves: Regulators around the world have also affected the rise of Bitcoin. The policymaker of any country's decision also affects related to bitcoin the best example is when japan declared bitcoin legal then bitcoin value increased by 2 per cent in one day so this is the best reason why regulatory moves affect bitcoin value.