The Capital Asset Pricing Model (CAPM) Essay Example
The Capital Asset Pricing Model (CAPM) Essay Example

The Capital Asset Pricing Model (CAPM) Essay Example

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  • Pages: 2 (468 words)
  • Published: October 28, 2018
  • Type: Case Study
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According to the study by Jagannathan and Miller (2002), the CAPM indicates a situation where the Net Present Value (NPV) has bipolar ends that define the market trends. These bipolar ends represent negative and positive NPV. For instance, at present, the exchange rate of P41.00 = $1 shows a significant increase in the value of the US Dollar against the Philippine Peso.

The Philippine commodity pricing remains heavily influenced by 00, even though the previous exchange rate of P50.00 = $1.00 is consistent with current domestic commodity pricing. The Capital Asset Pricing Model (CAPM) benefits the Net Present Value (NPV) of industrial goods such as oil, electricity, and other industrial products, as investments under the CAPM are incentivized through equity.

When it comes to exporting investments, the United States of America and European countries are major stakeholders. They often ob


tain a positive NPV when capital is invested into larger projects. As stated in Blachard (1993) studies by Jagannathan and Miler, CAPM takes a forward-looking approach to determine the market risk premium (Financial Management, pp.55-57, 2002). This determines the market risk premium over a country's economic portfolio, which may have a lower trading value due to currency exchange rates. Countries like the Philippines that rely on import and export trading often have a negative NPV. Domestic investments, on the other hand, focus on domestic trade.

Despite domestic investments, cheaper imported products are dominating the market over locally produced goods, such as the American Apple which costs only P15.00 while the Filipino Mango costs P20.00 a piece.

The foreign importer can benefit greatly from the positive NPV of Apple. However, investing in Mango production may come with potential risks

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due to its variable costs. Devaluation not only affects currency, but also valued export commodities. This has caused a shortage in the Philippines' domestic supplies due to the exportation of Mangoes to Japanese, American and European markets. Another factor to consider for achieving a positive NPV, as stated by Jagannathan and Miler (2002), is the draining of the cost capital of the economic portfolio.

The Philippines' investors may have difficulty acquiring domestic competition due to dependence on erratic foreign currency adjustments and imported goods' competitive prices. Despite this, CAPM supports the process of capital budgeting, which involves computing the investment's NPV and waiting for favorable opportunities to invest. Local and foreign investors in the Philippines wait for viable supply and demand events, particularly in raw materials where the rule is to wait for peak and lean seasons to roll on and off the capital cost. Warehousing of raw materials acquired during peak season offers discounted prices. (Jagannathan and Miler, 2002)

Processors and manufacturers are utilizing NPV while large corporations are taking a strategic approach to investing in various stages, from farming to distribution. An in-depth analysis of these abilities will be included in the depth and application component.

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