Capital asset pricing model and Proof of concept: Difference between pages

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(CAPM).  
''Product and software development''.


The model links the expected rates of return on traded assets with their relative levels of market risk (beta).
(POC).
The model’s uses include estimating a firm’s market cost of equity from its beta and the prevailing 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.
Proof of concept is the stage in product or software development in which it is established that the solution will function as intended.
Expressed as a formula:
Ke = Rf + beta x [Rm-Rf]


Where:


Ke = cost of equity.
<span style="color:#4B0082">'''''Banks well advanced in DLT applications'''''</span>
Rf = risk free rate of return.
Beta = relative market risk.
Rm = average expected rate of return on the market.


For example where:
:"Mark Williamson, global COO of FX cash trading and risk management at HSBC, said that 90% of banks are now at proof-of-concept stage for distributed ledger technology (DLT) applications, with HSBC having settled billions of dollars of internal FX transactions on a DLT solution since February 2018."
Rf = risk free rate of return = 4%;
Beta = relative market risk = 1.2; and
Rm = average expected rate of return on the market = 9%.


Ke = 4% + 1.2 x [9% - 4% = 5%]
:''The Treasurer magazine, December 2018 / January 2019, p12''
= <u>10%.</u>


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.
==See also==
*[[COO]]
*[[Distributed ledger]]
*[[Ideation]]
*[[Research & development]]


== See also ==
[[Category:The_business_context]]
* [[Beta]]
[[Category:Technology]]
* [[Business risk]]
* [[Capital gain]]
* [[Cost of equity]]
* [[Equity beta]]
* [[Equity risk]]
* [[Equity risk premium]]
* [[Financial risk]]
* [[Market risk]]
* [[Market risk premium]]
* [[Modern Portfolio Theory]]
* [[Risk]]
* [[Specific risk]]
* [[Systematic risk]]

Revision as of 13:24, 2 April 2019

Product and software development.

(POC).

Proof of concept is the stage in product or software development in which it is established that the solution will function as intended.


Banks well advanced in DLT applications

"Mark Williamson, global COO of FX cash trading and risk management at HSBC, said that 90% of banks are now at proof-of-concept stage for distributed ledger technology (DLT) applications, with HSBC having settled billions of dollars of internal FX transactions on a DLT solution since February 2018."
The Treasurer magazine, December 2018 / January 2019, p12


See also

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