Capital asset pricing model and Channel finance: Difference between pages

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imported>Doug Williamson
(Make beta lower case.)
 
imported>Doug Williamson
(Create the page. Source: GSCFF Standard Definitions.)
 
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(CAPM).  
Finance provided to a distributor to cover the holding of goods.


The capital asset pricing model links the expected rates of return on traded assets with their relative levels of market risk (beta).  
Channel finance is also known as 'distributor finance'.


The model’s uses include estimating a firm’s market cost of equity from its beta and the prevailing theoretical market risk-free rate of return.


The CAPM assumes a straight-line relationship between the beta of a traded asset and the expected rate of return on the asset.
==See also==
 
* [[Distributor finance]]
 
* [[Supply chain finance]]
Expressed as a formula:
* [[Liquidity]]
 
* [[Floor plan finance]]
Re = Rf + beta x ( Rm - Rf )
* [[Receivables finance]]
 
 
Where:
 
Re = return on security.
 
Rf = theoretical [[risk free rate of return]].
 
Beta = relative market risk.
 
Rm = average expected rate of return on the market.
 
 
'''Example'''
 
Rf = theoretical risk free rate of return = 4%.
 
Beta = relative market risk = 1.2.
 
Rm = average expected rate of return on the market = 9%.
 
 
Return on security (Re):
 
= 4 + 1.2 x ( 9 - 4 )
 
= 10%.
 
This investment requires an expected <u>rate of return</u> of 10%, higher than average rate of return on the market as a whole of only 9%, because its market <u>risk</u> (measured by beta = 1.2) is greater than the average market risk of only 1.0.
 
 
Under the capital asset pricing model only the (undiversifiable) market risk of securities is rewarded with additional returns, because the model assumes that rational market participants have all fully diversified away all specific risk within their investment portfolios.
 
 
 
== Use of the CAPM to quantify cost of equity ==
 
When the CAPM is used to calculate an estimate of the cost of equity, it is conventionally expressed as:
 
Ke = Rf + beta x ( Rm - Rf )
 
Where:
 
Ke = cost of equity.
 
 
== See also ==
* [[Beta]]
* [[Business risk]]
* [[Capital gain]]
* [[CertFMM]]
* [[Cost of equity]]
* [[Equity beta]]
* [[Equity risk]]
* [[Equity risk premium]]
* [[Financial risk]]
* [[Market risk]]
* [[Market risk premium]]
* [[Modern Portfolio Theory]]
* [[Risk]]
* [[Security Market Line]]
* [[Specific risk]]
* [[Systematic risk]]
 
[[Category:Corporate_finance]]

Revision as of 11:08, 20 June 2016

Finance provided to a distributor to cover the holding of goods.

Channel finance is also known as 'distributor finance'.


See also