High or low risk : investor's dilemma on cost of equity /
The focus of the case study is the use of the Capital Asset Pricing Model (CAPM) in measuring the cost of equity and discussion of its primary weaknesses as a model, such as assuming one single source of risk (i.e., market risk). The case attempts to compute the CAPM sensitivity factor (beta) for tw...
| Main Authors: | , |
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| Format: | eBook |
| Language: | English |
| Published: |
London :
SAGE Publications: SAGE Business Cases Originals,
2023.
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| Series: | SAGE business cases.
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| Subjects: | |
| Online Access: | Connect to the full text of this electronic book |
| Summary: | The focus of the case study is the use of the Capital Asset Pricing Model (CAPM) in measuring the cost of equity and discussion of its primary weaknesses as a model, such as assuming one single source of risk (i.e., market risk). The case attempts to compute the CAPM sensitivity factor (beta) for two different stocks: Sun Pharmaceutical Industries Ltd and Larsen & Toubro Ltd, and to determine the fund manager's investment strategies in selecting the right stock. The case outlines market risk influence on the covariance among assets using a regression model. The fund manager wants to know the risk and expected return of the different stocks and decides to use the classic CAPM to value the cost of equity, which primarily includes the beta coefficient and market premium. The objective of the case study is to apply CAPM to these two stocks and to compute each asset's sensitivity (i.e., beta) to non-diversifiable market risk. To do that, we will use a simple linear regression model, then a normal process to validate the model's assumptions and ensure its stability over the data sample. Moreover, the case compares the cost of equity calculation of two different companies, one with high risk and the other with low risk, using the CAPM approach. |
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| Physical Description: | 1 online resource : illustrations. |
| ISBN: | 9781529610352 1529610354 |