Question
Compare and contrast the assumptions that need to be made to compute a required return using CAPM and the constant-growth model. How should you handle
Compare and contrast the assumptions that need to be made to compute a required return using CAPM and the constant-growth model. How should you handle a case where required return computations from CAPM and the constant-growth model are very different?
This is a discussion question. No other information was provided for this question. The text notes that CAPM is an asset pricing theory based on a beta, a measure of market risk.
"There are two ways to obtain a beta. First, given the returns of the company and the market portfolio, you can compute the beta yourself. Second, you can find the beta that others have computed through financial information data providers (Cornett et al., 2019, p. 298). To compute your own beta, first obtain historical returns for the company of interest and of the market portfolio. Then run a regression of the company return as the dependent variable and the market portfolio return as the independent variable. The resulting market portfolio return coefficient is beta (Cornett et al., 2019, p. 299)."
Cornett, M. M., Adair, T. A., & Nofsinger, J. R. (2019). Finance (4th ed.). McGraw-Hill
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