[the peRFormaNce of CAPM and ABT in the period 1885-1925]

by

ACKNOWLEDGEMENT

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

Signed __________________ Date _________________

ABSTRACT

This study deals with the performance of Capital Asset Pricing Model and its anomalies in Capital Market of Holland. CAPM is a financing Model used to evaluate the value of market portfolios by examining the relating systemic risk and the expected return. In actuality, the theory divides risk into two categories of risk, systemic and specific. Although, the capital asset pricing Model only reimburses investors for the systemic risk of the holding a portfolio since specific risk can be diversified away. Risk in the capital asset pricing Model is assumed as wanting to be avoided but if risk is accepted then investors expect to be rewarded, called risk premium. In addition to the risk premium paid to the investor, he or she will also be rewarded the risk free return rate. The first Part of the study deals with the basic definition, advantages and application of CAPM. CAPM is tool used for risk return analysis. It helps to know the Company's Cost of capital. In the first part of the study CAPM calculation, CML, SML etc has been explained. In the second chapter the literary review about capital asset pricing Model is stated. CAPM is based on Markowitz Modern portfolio theory. Various other scholars gave their own analysis for CAPM Model. Like Fama modified CAPM and gave an alternative version called CCAPM which is Conditional Capital Asset Pricing Model. The attraction of the CAPM is that it offers powerful and intuitively pleasing predictions about how to measure risk and the relation between expected return and risk. Unfortunately, the empirical record of the Model is poor—poor enough to invalidate the way it is used in applications. The CAPM's empirical problems may reflect theoretical failings, the result of many simplifying assumptions. But they may also be caused by difficulties in implementing valid tests of the Model In the third chapter Alternative Model is described and a comparison between Arbitrage Pricing Model and Captial Asset Pricing Model.

TABLE OF CONTENTS

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 1: INTRODUCTION1

Assumption of CAPM2

Beta and Standard Deviation3

Risk Free Assets4

Objectives of the study4

Research questions5

Significance of the Study5

CHAPTER 2: LITERATURE REVIEW6

Asset Pricing Models6

Understanding Risk and Return8

The Pricing of Individual Assets and the Risk-Free Rate12

Stochastic Discount Factors and Risk Premiums13

Systematic and Unsystematic Risk18

The Capital Asset Pricing Model (CAPM)19

Roll's Critique24

The Intertemporal CAPM25

Consumption-Based CAPM27

The Empirical Performance of Asset Pricing Models28

CHAPTER 3: METHODOLOGY34

CHAPTER 4: RESULTS AND ANALYSIS42

CHAPTER 5: CONCLUSION52

REFERENCES54

CHAPTER 1: INTRODUCTION

The CAPM was developed in the mid 1960's. The model has generally been attributed to William Sharpe, but John Lintner and Jan Massin also ...