Capital Assets Pricing Model (CAPM), referred to Arbitrage Pricing Theory (APT) is an equilibrium model of asset pricing but assumes that the returns are generated by a factor model. Its assumption vis-a-vis those of CAPM are set out first: APT: i. Investors do not look at expected returns and standard deviations. ii. Risk Return Analysis is not the basis. Investors [...]
In this article we will discuss about:- 1. Introduction to Random Walk Hypothesis 2. Random Walk Assumptions 3. Schematic Presentation 4. Test 5. Essence 6. Limitations. Introduction to Random Walk Hypothesis: There are theoretically three approaches to market valuation, namely, efficient market hypothesis, fundamental analysis and technical analysis. Under fundamental analysis, the share value depends on the intrinsic worth of [...]
Markowitz Model had serious practical limitations due to the rigours involved in compiling the expected returns, standard deviation, variance, covariance of each security to every other security in the portfolio. Sharpe Model has simplified this process by relating the return in a security to a single Market index. Firstly, this will theoretically reflect all well traded securities in the market. [...]