Finance Numericals

Arbitrage Pricing Theory :  It is developed by Stephen Ross in 1976. It is a linear model and used for estimating the asset price. It helps to determine the assets are overvalued or undervalued. With the help of arbitrage investors can make a profit through price differences of asset without any investment. There are many macro economic factors (like inflation) and market and security specific factors which affect the price of an assets and it is difficult  to determine which factor consider or which should not. There are some factors which affect the price of security like- ·          Inflation ·          Gross Domestic Product ·          Interest rate ·          Market index ·          Investors confidence ·          Shift o...

Single Index Model Assumptions of Single index model: ·          The first assumption of single index model is that the security return is affected by only one factor i.e systematic risk. ·          The investors have homogeneous interest. ·          The investors hold security for fixed period to estimate the risk and return on security. Advantages of Single Index Model: ·          With the help of this model the number of input is decreases to calculate expected return on security. ·          The model helps to determine the systematic risk and unsystematic risk on security. ·          It makes easier to calculate the expected return of security. Example : Mr. Sharma has invested in a portfolio in which 4 different securities ...

  Single index Model:   It is an asset pricing model which is developed by William Sharpe in 1963. This model is also known as Sharpe index model and Market Model. With the help of this model optimum portfolio is calculated. It measures the expected return and portfolio risk. This model helps to determine how changes in the market affect the expected return of securities in a portfolio. Only 3 n parameters are needed in this model that is expected return, beta, firm specific variance and two special parameters is market return and market variance. Risk:  It is a difference between actual return and expected return. There are two type of risk: Systematic risk (market risk affects all company or industry in market) and unsystematic risk (specific risk related to company or industry). Systematic risk =  β i 2  *σ m 2  (variance of market index) Unsystematic risk (e i 2 ) =  σ i 2  - β i 2 σ m 2 Total risk =  β i 2  σ m 2 +...