Although the model is widely accepted and practically used as explained above, it is nevertheless far from being perfect as outlined in its record of empirical studies.9 Generally criticized is on the one hand that the underlying assumptions of the model are very theoretical and thus not able to illustrate reality and on the other one that there are problems in implementing well-founded tests of the model relating to the choice of the right market portfolio.10 But, the success of the CAPM will remain as long as there is no other model which offers as “[…] powerful and intuitively pleasing predictions about how to measure risk and the relation between risk and return.”11 The objective of this study is to empirically test the CAPM on the German stock market. Since most of the empirical studies that have been made in the past focus on the U.S. stock market, this paper will try to find out if the results of these U.S. empirical studies can also be shown on the German stock market. Therefore, the goal of this paper is to analyze the relationship between risk and return on the German stock market to find out whether the CAPM holds.
Inhaltsverzeichnis (Table of Contents)
- 1 Introduction
- 1.1 Motivation and Objective
- 1.2 Course of Exploration
- 2 The Capital Asset Pricing Model
- 2.1 The Model
- 2.2 Criticism and Shortcomings
- 3 Previous Research
- 4 Empirical Study
- 4.1 Data
- 4.2 Methodology
- 4.3 Results, Interpretations and Findings
- 5 Summary and Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This seminar paper explores the validity of the Capital Asset Pricing Model (CAPM) within the context of the German stock market. The paper's primary objective is to test the CAPM's predictive power in relation to the German market, considering its inherent limitations and criticisms. This analysis aims to contribute to the ongoing debate surrounding the CAPM's applicability in real-world investment scenarios.
- The validity and predictive power of the CAPM in the German stock market
- Analysis of the CAPM's strengths and weaknesses in relation to practical investment decisions
- Evaluation of empirical evidence regarding the CAPM's performance
- Discussion of potential limitations and shortcomings of the model
- Exploration of alternative asset pricing models and their implications
Zusammenfassung der Kapitel (Chapter Summaries)
The paper begins by introducing the motivation behind this study and outlining the course of exploration. Chapter 2 provides a detailed explanation of the CAPM, its core principles, and its underlying assumptions. It also explores the model's historical context and its enduring significance in finance. Chapter 3 delves into previous research concerning the CAPM and its application in various markets, particularly focusing on studies related to the German stock market. Chapter 4 presents a thorough empirical study that tests the CAPM using real-world data from the German market. This chapter outlines the data sources, the methodology employed, and the resulting findings and interpretations. The final chapter, which is excluded from this preview, summarizes the study's key conclusions and implications for investors and researchers alike.
Schlüsselwörter (Keywords)
The key concepts explored in this paper revolve around the Capital Asset Pricing Model (CAPM), its application to the German stock market, and its relevance to real-world investment decisions. This analysis focuses on the model's ability to predict asset returns, its empirical performance in the German market, and its inherent limitations and shortcomings. The study also delves into alternative asset pricing models and their relative merits. Key terms include CAPM, German stock market, asset pricing, risk and return, systematic risk, beta, empirical testing, and portfolio optimization.
Frequently Asked Questions
What is the objective of testing the CAPM on the German stock market?
The goal is to analyze the relationship between risk and return in Germany and determine if the Capital Asset Pricing Model holds true outside of the U.S. market.
What are the main criticisms of the CAPM?
Criticisms include its theoretical underlying assumptions that may not reflect reality and the difficulty of choosing a correct market portfolio for testing.
How does the CAPM define systematic risk?
Systematic risk, or non-diversifiable risk, is measured by Beta, which represents how much an individual stock moves in relation to the overall market.
Why is the CAPM still widely used despite its flaws?
It remains popular because it offers an intuitively pleasing and powerful prediction of the relationship between risk and expected return that other models haven't fully replaced.
What methodology is used to test the CAPM in this study?
The study uses empirical data from the German market, applying statistical analysis to find correlations between asset betas and historical returns.
- Quote paper
- Daniel Loskamp (Author), 2005, Testing the CAPM on the German Stock Market, Munich, GRIN Verlag, https://www.grin.com/document/54593
