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Does Your Life Include a RIPE Plan?—Planning Tips for Retirement, Investing, Protection, and Estate Planning – Part 2 (Investing)
Does Your Life Include a RIPE Plan?—Planning Tips for Retirement, Investing, Protection, and Estate Planning – Part 2 (Investing) by: Janet L. Hall After reviewing your retirement plan, or lack of one, you might have had a huge eye opener to the...
Halliburton Under Fire
The shareholders of Halliburton are trying to stop state-sponsored terrorism, using the same economic leverage that was effective against South African racism in the 1970's. Back then, shareholders used corporate resolutions to stop companies...
Offshore investing: spreading risk helps sleep
The world’s economies still dance to different tunes and have different boom and bust cycles that tend to offset each other, even though the differences are getting smaller. As a result, international stocks can provide diversification for a...
"Solo" 401(k) Plans Offer Big Tax Deductions: Tax-Deferred Investing to the Max
Major changes to the tax laws now allow small business owners to establish 401(k) plans more easily than ever before, and benefit from bigger 401(k) plan deductions than they've ever seen. These 401(k) plans have been dubbed "solo" 401(k) plans...
Start Small and Your Wealth Will Get Bigger
We’ve all heard the phrase, “You have to start somewhere.” Nothing could be truer of creating wealth and prosperity in your life. Sometimes the idea of becoming wealthy can seem so overwhelming that we don’t know where to begin. After all, if...
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The Capital Asset Pricing Model of Stock Investing (CAPM)
In 1990 Harry Markowitz, Merton Miller, and William Sharpe
shared the first Nobel Prize in the very young area of financial
economics. The Nobel committee recognized Harry Markowitz for
developing portofolio theory, Miller for the theory of corporate
finance, and Sharpe for the Capital Asset (stock market) Pricing
Model also known as CAPM.
CAPM was the crowning acheivment of theoretical economists bent
on proving that markets are efficient and work together
mathematically with the precision and elegance of a Rolex watch.
In the 1980s, researching financial economists began to notice a
slew of empirical results that are not consistent with the view
that stock market returns were determined in accordance with
CAPM and stock market efficiency.
It is useful for you to understand what CAPM is because you will
read or hear about it as you progress as a stock market
investor. CAPM is a regression model designed to separate out
the general stock market price changes from price changes
specific to a given stock. The general stock market price change
is called unsystematic risk. An investor can get the same return
as the general stock market buying a mutual fund that is indexed
to the stock market such as the Vanguard 500 fund (symbol
VFINX). For this reason the amount of profit you receive on a
specific stock that is as much as the stock market
indexes is
said to not be priced into the stock in terms of the risk you
are taking. The amount you make or lose on a given stock as
compared to the stock market averages is considered to be priced
by investors to compensate for the additional risk you take in
buying stock in a single company instead of a fund indexed to
the stock market. The profit or loss that you receive as
compared to the stock market is called systematic risk. The
capital asset pricing model measures systematic risk with a
regression coefficient called beta. When I talk about beta now
you know what it is; it is nothing more than a measure of
additional potential return an investor should receive for
purchasing a single stock based on how risky that stock is. I
want to emphasize that CAPM is based on the notion that the
stock market efficiently translates all information known about
the stock market into stock prices for stock investing purposes.
About the author:
Dr. Brown can teach you how to invest through The Delano Max
Wealth Institute (www.DelanoMax.com). He is dedicated to
providing you with courses and seminars that teach prudent
savings and investing habits. Dr. Brown is also a finance
professor at the University of Puerto Rico at Rio Piedras. He is
also recognized as an expert at low risk, high return investing
and takes great pride in helping others retire safely.
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