Running Head: Capital Asset Pricing ModelCapital Asset Pricing ModelRunning Head: Capital Asset Pricing ModelQuestion 1What are the primary advantages and disadvantages of the Capital Asset Pricing Model(CAPM) compared with the Constant Dividend Growth Model for use in pricing common stock?Answer 1Advantages of the Capital asset pricing model are: this method focuses on systematic riskbecause investors have expanded their portfolios; unsystematic risk has been removed in thismethod. Most of the experts give their opinion that it is more effective and authentic thanconstant dividend growth model because CAPM considers the level of systematic risk against thewhole stock market and in this way company can compare itself to the market to make aneffective decision. Capital asset pricing model is mostly criticized because in this method manyassumptions are used that questions its reality and increases the risk for the investorsinvestment. In addition to this, the short and single period is considered in this method while theinvestments are assumed to be constant over a longer time; therefore, it is the limitation of thismethod.Question 2Can either or both of thes ...
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