Using the Capital Asset Pricing Model and Arbitrage Pricing Theory in Capital Budgeting

Young, Steven D.; Saadi, Samir; Baker, H. Kent; English, Philip

doi:10.1002/9781118258422.ch19

Cited by 2 publications

(4 citation statements)

References 60 publications

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“…A point of criticism that is frequently raised in secondary literature is that the CAPM itself and also portfolio selection theory, from which it is derived, are based on many unrealistic simplifying assumptions (Fama and French 2004;Young and Saadi 2011;Berkman 2013). Examples of such assumptions are that all investors behave rationally according to their utility function, that they have homogeneous expectations and that funds can be borrowed or lent at the same interest rate (Sharpe 1964).…”

Section: The Capital Asset Pricing Modelmentioning

confidence: 97%

“…However, the main problem with the APT is that there is no agreement about the factors that make up the model (Young and Saadi 2011;Arnold 2008;Brailsford 2007). Brailsford (2007) additionally points out that even if at one point in time, there was agreement about the factors, one could still not be sure that the factors would remain constant over time in a dynamic environment.…”

Section: Alternative Models For the Determination Of Cost Of Equitymentioning

confidence: 97%

“…For the determination of cost of equity, theoretical capital market models can be used that examine the returns on the stock market. In practice, the use of Lintner (1965) and Sharpe's (1964) Capital Asset Pricing Model (CAPM) prevails (Young and Saadi 2011;Hoffjan 2009). The CAPM builds, among others, on Markowitz's (1952) model of portfolio selection (Sharpe 1964).…”

Section: The Capital Asset Pricing Modelmentioning

confidence: 99%

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Background: Cost-of-Capital in the Finance Literature

Schlegel¹

2015

Contributions to Management Science

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The literature review in this thesis is distributed over two chapters. The aim of Chap. 2 is to discuss literature from the field of cost-of-capital. This is necessary as a foundation for the subsequent chapter, which is more application-oriented. In Chap. 3, previous empirical results on companies' cost-of-capital practices are discussed. Research gaps will be identified at the end of that chapter.This chapter is structured as follows: In Sect. 2.1, the broader field of company cost-of-capital is discussed. This includes a brief discussion of traditional seminal papers as a foundation for the rest of the literature review as well as a review of contemporary discussions about general issues of cost-of-capital, such as alternative determination models and the consideration of unsystematic risk. Section 2.2 shows how the field of cost-of-capital relates to the different sub-disciplines of Finance and for which fields of application of Managerial Finance it is relevant. In particular, the role of cost-of-capital in internal capital allocation, performance measurement and value-based management is discussed. In Sect. 2.3, a theoretical framework for the determination of cost-of-capital in a company group context that is derived from traditional Finance theory is presented as a foundation for the subsequent section. In Sect. 2.4, previous research on the determination techniques for the cost-of-capital of business units and projects is discussed thoroughly. This includes a detailed discussion of the techniques as well as the theoretical and empirical methods adopted by other researchers.

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Section: The Capital Asset Pricing Modelmentioning

confidence: 97%

Section: Alternative Models For the Determination Of Cost Of Equitymentioning

confidence: 97%

Section: The Capital Asset Pricing Modelmentioning

confidence: 99%

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Background: Cost-of-Capital in the Finance Literature

Schlegel¹

2015

Contributions to Management Science

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“…As mentioned before, the CAPM and APT are indicated as the most common tools for predicting the opportunity cost of capital, which is one of the leading financial challenges for managers. In this context, the validity of the CAPM and APT to predict the cost of equity capital was discussed by Young and Saadi (2011). Based on the research, CAPM was still found to be the most effective and dominant tool for predicting the cost of equity.…”

Section: Literature Reviewmentioning

confidence: 99%

Role of International Trade Competitive Advantage and Corporate Governance Quality in Predicting Equity Returns: Static and Conditional Model Proposals for an Emerging Market

Muzır

Kızıl

Ceylan

2021

JRFM

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This paper aims to develop some static and conditional (dynamic) models to predict portfolio returns in the Borsa Istanbul (BIST) that are calibrated to combine the capital asset-pricing model (CAPM) and corporate governance quality. In our conditional model proposals, both the traditional CAPM (beta) coefficient and model constant are allowed to vary on a binary basis with any degradation or improvement in the country’s international trade competitiveness, and meanwhile a new variable is added to the models to represent the portfolio’s sensitivity to excess returns on the governance portfolio (BIST Governance) over the market. Some robust and Bayesian linear models have been derived using the monthly capital gains between December 2009 and December 2019 of four leading index portfolios. A crude measure is then introduced that we think can be used in assessing governance quality of portfolios. This is called governance quality score (GQS). Our robust regression findings suggest both superiority of conditional models assuming varying beta coefficients over static model proposals and significant impact of corporate governance quality on portfolio returns. The Bayesian model proposals, however, exhibited robust findings that favor the static model with fixed beta estimates and were lacking in supporting significance of corporate governance quality.

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Using the Capital Asset Pricing Model and Arbitrage Pricing Theory in Capital Budgeting

Cited by 2 publications

References 60 publications

Background: Cost-of-Capital in the Finance Literature

Background: Cost-of-Capital in the Finance Literature

Role of International Trade Competitive Advantage and Corporate Governance Quality in Predicting Equity Returns: Static and Conditional Model Proposals for an Emerging Market

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