Statistics presentation Coursework Example | Topics and Well Written Essays - 1500 words

Statistics presentation - Coursework Example This formula is based on the risk free rate of the security, the beta factor of that security and the difference between the risk free rates of that stock. Understanding the testing of the CAPM, requires a good knowledge of these components of the CAPM. Investing in various securities in the securities market has various risks that the investors must consider when putting their funds in such securities (Sharpe, 2010). These risks are represented in the CAPM formula are the unsystematic risk in the market. The risk in each company’s stock is accounted for in the capital asset pricing model formula with the beta factor as the unsystematic risk factor. In this work of capital asset pricing model testing, beta factor in the formula is used to measure the level of risk when an investor decides to invest in any of the 20 companies discussed relative to the market risk (Mullins, 2012). For this coursework, the beta of the market would be 1 of the FTSE market index of the 20 companies. In measurement of the CAPM, an individual security, which will have a beta of 1.5 will be riskier than the market and less risky than the market if the stock has a beta of 0.5. The formula of the Capital Asset Pricing Model is given as The risk free rate in the Capital Asset Pricing Model (CAPM) formula is the rate which is expected by the investors to be free from any risk when they invest in any of the companies’ stocks. These are like the Treasury bill rate for governments and are generally used as it is short term. Besides, the risk premium is also a component of the CAPM. The capital asset pricing model is made up of two components. If this market risk is multiplied by the beta factor of the market and added to the risk free rate, then, the expected return of the stock can be determined and tested in this case (Lakonishok and Allan, 2013, pp.16). Risk is the same with the volatility. For example, if the market risk is 1 and in the test a better of 2 was found then, the