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

The Capital Asset Pricing Model (CAPM)

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  • Pages: 2 (593 words)
  • Published: October 28, 2018
  • Type: Case Study
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In Jagannathan and Miler study (2002), the CAPM is perceived at a given situation of the Net Present Value (NPV) at bipolar ends. The bipolar ends of negative and positive NPV point out to the market trends. For example, the US Dollar soar high against the value of the Philippine Peso at a current exchange rate of P41. 00 = $1.

00 has still dominating effect to the Philippine commodity pricing, as though the previous exchange rate was P50. 00 = $1. 00 does not differ to the current domestic commodity pricing.The CAPM then is a gainer for the NPV of industrial goods, like in oil, electricity and other industrial products where investments, under the CAPM, gains incentives from equity.

The United States of America and the European countries, being the major stakeholders of exporting investments may always acquire the positive NPV wherein money ably divested to a larger capital investment. As cited by Jagannathan and Miler in Blachard (1993) studies, CAPM takes a forward-looking perspective to determine the market risk premium (Financial Management, pp.55-57, 2002). What is then referred to be is the determination of the market risk premium over the economic portfolio of a country to which the trading value is lower as ruled out by the currency exchange, in particular. The Philippines as a country depending on the export and import trading is always on a losing proposition and at the negative pole of NPV. The domestic investments evolve in domestic trade.

But the domestic investments are engulfed by the influx of cheaper imported products than the locally produced goods.Like for

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instance, the price of an American Apple is cheaper than the Filipino Mango. The Apple costs P15. 00 against the Mango that costs P20. 00 a piece.

The NPV of the Apple is much positive for the foreign importer. On the other hand, investing to the production of Mangoes may take the potential risk, wherein the production consist variable costs. The effect of devaluation does not only imply demonization of money but the commodities that are valued for exports.In the case of exportation of Philippines’ Mangoes to the Japanese, American and European markets have rippled to shortage in domestic supplies. Another consideration of attaining the positive NPV as cited from Jagannathan and Miler (2002) is the draining of the cost capital of the economic portfolio.

Again, the Philippines’ investor may unable to acquire the competition at the domestic level wherein the domestic trading depends on the erratic foreign currency adjustments and competitive prices of imported goods.However, it is said that CAPM favors the process of capital budgeting which involves computation of the NPV of investment, as finance managers compute the cost of capital and wait for an opportunity of favorable investment (Jagannathan and Miler, 2002). In the experience of Philippines’ financial investments, local and foreign investors wait for the turn around of events at a particular time where supply and demand of commodities is viable. In commodities pertaining to raw materials, the rule of waiting the opportunity to roll on and roll off the cost of capital is acquired through peak and lean season.The best discoun

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it gets is the warehousing of raw materials acquired during the peak season where lower and discounted price are availed.

The application of NPV is being gained by processors and manufacturers. On the other hand, large domestic enterprises and corporations have their strategic approaches by investing from the farm to the plant operation and towards domestic and foreign distribution or marketing of fresh and processed goods. A more extensive review on these capabilities will form part of the depth and application component.

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