Capital asset pricing model and Cash: Difference between pages

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imported>Doug Williamson
(Added "theoretical" to references to risk-free rate. Added internal reference to risk-free rate of return.)
 
imported>Doug Williamson
m (Add link.)
 
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(CAPM).  
1.


The capital asset pricing model links the expected rates of return on traded assets with their relative levels of market risk (beta).  
The most liquid of current assets, cash represents money in hand or in banks or other financial institutions which is immediately available.


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.
2.


Physical banknotes and coins.


Expressed as a formula:


Ke = Rf + beta x [Rm-Rf]
3. ''Financial reporting - balance sheet - assets.''


Where:
Current asset reported, along with cash equivalents, as a single aggregated figure in the primary statement of financial position.


Ke = cost of equity.


Rf = theoretical [[risk free rate of return]].


Beta = relative market risk.
== See also ==
 
* [[Balance sheet]]
Rm = average expected rate of return on the market.
* [[Cash and cash equivalents]]
 
* [[Cash burn rate]]
 
* [[Cash market]]
For example where:
* [[Cash reserves]]
 
* [[Cashflow]]
Rf = theoretical risk free rate of return = 4%;
* [[Cashflow statement]]
 
* [[Current assets]]
Beta = relative market risk = 1.2; and
* [[Funds]]
 
* [[Fungible]]
Rm = average expected rate of return on the market = 9%.
* [[Legal tender]]
 
* [[Liquidity risk]]
 
* [[Money]]
Ke = 4% + 1.2 x [9% - 4% = 5%]
* [[Payments and payment systems]]
 
* [[Petty cash]]
= <u>10%.</u>
* [[Statement of financial position]]


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.
[[Category:Cash_management]]
 
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 ==
* [[Beta]]
* [[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 11:16, 24 December 2020

1.

The most liquid of current assets, cash represents money in hand or in banks or other financial institutions which is immediately available.


2.

Physical banknotes and coins.


3. Financial reporting - balance sheet - assets.

Current asset reported, along with cash equivalents, as a single aggregated figure in the primary statement of financial position.


See also

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