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Taxes (Example)

EXAMPLE Suppose the investor is expected to have return of 10 per cent (consisting of a dividend 10 per cent and 10  per cent capital gain on initial value) by holding securities in Company X. Company Y is expected to provide dividend yield of 11 per cent and capital...

EXTENDED CAPM

EXTENDED CAPM The CAPM is essentially a single-factor model in that the security’s expected return depends on a single factor, namely, beta. But there may be other factors. apart from beta, which may affect required returns. Therefore, the inclusion of these...

Taxes

Taxes The investor receives return on security in the form of dividend income and capital gains or losses. Accordingly. the lax liability of the investor is of two types: (i) tax on dividend income and (ii) tax on capital gains.  When both the types of income arts...

Validity of the CAPM

Validity of the CAPM The capital asset pricing model is a rigorously derived equilibrium model. Like any other economic model, it is an abstraction and simplification of reality. It has been widely used and hailed. Its popularity may be ascribed to a set of four...

Under- and Over-valued Assets:

Under- and Over-valued Assets: If individual assets and portfolios are priced correctly, they lie exactly on the SML. Assets plotting off the SMI, indicate misprinting of assets by the market, Assets that plot above the SML are undervalued. They offer higher expected...

Unlevering and Relevering Beta

Unlevering and Relevering  Beta It may be recalled that the beta of a portfolio formed by combining two assets is the weighted average of their betas. If we view all the assets of a firm as a portfolio of debt and equation, (the two sides of the balance sheet of the...