A Review of Capital Asset Pricing Model (CAPM) and its extension to Fama French Model and Pastor Stampaugh Model PDF

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A Review of Capital Asset Pricing Model (CAPM) and its extension to Fama French Model and Pastor Stampaugh Model

A Review of Capital Asset Pricing Model (CAPM) and its extension to Fama French Model and Pastor Stampaugh Model

Introduction: Many researchers founded the concept of Capital Asset Pricing Model very important. Markowitz (1952) and Tobin (1958) founded the development of asset pricing models. Galagedera (2007) wrote that early theories suggest that the risk of individual security is the standard deviation of its returns which is a measure of the fluctuations of return. Lintner (1965), Mossen (1966), Fama, French (1992), Black et al. (1972) they all made contributions by expanding the model. CAPM developed by Sharpe (1964) and Lintner (1965) associates the expected rate of return for individual security with a measurement of its methodological risks. CAPM uses historical returns to estimate expected returns. CAPM conveys the idea that securities are priced so that the expected returns will compensate investors for the expected risks. There are two main relationships: the Capital Market Line (CML) and the Stock Market Line (SML). These two models are the basic building blocks of CAPM derivation (Sharpe, 1964; Lintner, 1965). The expected net return on an asset is similar to β the expected return from a risk-free investment in the CAPM can be given by familiar Sharpe-Lintner equations (1) and (2): β i=cov (Ri , Rm)/ σ 2( Rm ) Ε ( Ri ) =R f +Β i [ Ε ( R m )−R f

(1)

]

i = 1,...,N

(2) Page|1

Fama and French (2012) have created models that incorporate local and global risk standards for developed markets in North America, Europe, Japan, and the Asia Pacific region. One of the most common asset pricing models is the Fama and French (1993) three-factor model, which consists of market factors, size and value. This model was built on the basis of the results of Fama and French (1992) that the Capital Asset Pricing Model (CAPM) is inappropriate to explain the differences in equity returns, Fama and French can significantly improve CAPM's interpretative ability. ΗΜ...