Market Efficiency Capital Asset Pricing Model
Market Efficiency and Capital Asset Pricing Model (CAPM) a
- c) Compare and contrast the theories and models that analyse risk
- f) Analyse and criticise the merits of the Capital Asset Pricing Model
- i) Present in a competent and confident manner
- j) Undertake effective research for additional information
This assignment would enhance/test skills to conduct critical review of existent literature, use of computational skills and critical analysis.
Topic: The frameworks and theories surrounding the relationship between the return on a security and its risk profile are pivotal to understanding valuation of securities and capital budgeting decisions. We use these models to understand and measure Beta, and use this concept in cost of capital studies.
You are required to:
1) Review fundamental features of Efficient Market Hypothesis (EMH) and CAPM 2) Critically review popular literature (e.g. journal articles) related to the CAPM and appraise the effectiveness of the model in the 21st century 3) Collect data and analyse your findings about existing theory and empirical work on this topic.
Use tables and graphs to present your results and demonstrate skill to confront existing literature and include your critical analysis.
While writing your reports, please follow the guidance as detailed below:
|Section||Word limit||Marks distribution|
|Theory: critical review of fundamentals of EMH and CAPM||400||15%|
|Literature review: critically review journal articles related to the CAPM and appraise effectiveness of the model in the 21st century||500||25%|
|Application: Implementation of model and findings||600||30%|
|Conclusion and Recommendations||200||10%|
|Writing style, structure and presentation||5%|
Reference and Appendix: Please note that reference and appendix are not included for word limit. You should follow Harvard Referencing Guide for reference. Appendix would include parameter definitions, formula, data and your calculations.
Some notes on methodology and data processing
Data: Using data from Yahoo Finance/Google Finance/ORBIS/Datastream, you are to create six portfolios of equally weighted stocks (use a minimum of 10 FTSE 100 companies for each portfolio). In fact there are 2 groups of portfolios: three portfolios are based on beta and other three are based on the standard deviation.
The portfolios should have following structure: Portfolio Group One Portfolio Group Two Portfolio A: low beta Portfolio D: low standard deviation Portfolio B: medium meta Portfolio E: medium standard deviation Portfolio C: high beta Portfolio F: high standard deviation
Method: You are to calculate average monthly return for those portfolios for the period 2011-16 and a combined 6 years (72 months) portfolio and compare individual portfolio performance within the group and across the group to establish efficiency or the market and effectiveness of the model.
Across the groups, you will compare performance of your beta portfolios with standard deviation portfolios. Make sure you present your tables and graphs when you explain your findings. You must give a critical appraisal of your results and cross reference them with popular literature on the topic.
Market Efficiency Capital Asset Pricing Model
? Maximum word limit for the report is 2,000 words (excluding tables and diagrams).
Exceeding word limit will be penalized.
? The assignment must be word processed with an appropriate front sheet (available on NILE). Please note that your work will not be marked if you do not include a Front sheet.
? The assignment should be doubled-spaced and in font-size 12.
? Please note that your work will be penalized for poor presentation.
? You work will not be marked if there is no referencing and appendix data.
? You should not plagiarise, i.e., all the work submitted has to be written by yourself not taken from the work of someone else – either it be in a book, on the web, in an article, from a lecturer’s notes or some other student work.
? Word count: All assessments have a word count with a tolerance of 10% only. Submissions that exceed the word count will be penalized as followsone grade point for every 150 words or part thereof. (The grade point refers to one grade movement. e.g. a one-point penalty when the assessment grade is B+ will be downgraded to B. A two-point penalty would down grade the assessment to B-, three points to C+.)
? References and appendix data- missing-the assignment will not be marked.
? Front sheet missing-penalty one grade point
? Word count missing or inaccurate-penalty one grade point
Please note that front sheet, contents page, reference and any appendices would not count in the word count. For guidance on submission of your work and marking criteria, please read module guide.
To summarize, your work should include:
1) Front sheet and Tutor Comments sheet
2) A title page with word count
3) Table of Contents page
4) An introduction and intended outcomes
5) Review the fundamental features of EMH and CAPM
6) Critical review of literature (journal articles) related to the CAPM with a focus on effectiveness of the model in the 21st century
7) Results and findings of your own analysis conforming/confronting with existing literature and include your critical analysis
8) Reach conclusion
9) Reference (bibliography)
10) Appendices (Excel tables showing portfolio and performance of the portfolio)