In valuation of investments, one has to consider his assets in the portfolio as a part of his total investments. In considering the portfolio, not only returns are to be considered as in the case of single investments but their risks also. Two plus two will not make it four in the aggregation of risks, as shown by famous author [...]
The following points highlight the four important theories of CAPM. The theories are:- 1. Random Walk Theory 2. Trend Walk Theory 3. Capital Asset Pricing (CAP) Theory 4. Modern Portfolio Theory. 1. Random Walk Theory: This theory holds that no one can predict the prices of shares based on the past or historical trends. As the market is assumed to [...]
The CAPM was developed to explain how risky securities are priced in market and this was attributed to experts like Sharpe and Lintner. Markowitz Theory being more theoretical, CAPM aims at a more practical approach to stock valuation. It is no doubt based on the mean-variance approach to risk for assessment of investment as developed by Markowitz. It explains the [...]