Advance Asset Pricing Model Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Abstract

The main purpose of the research analysis is to conduct the deep study of the Advance Asset Pricing Model (AAP). The asset pricing model is used to determine the price of the financial asset of the organization. The asset pricing model has the capability to itself design the mechanism of pricing in the complex financial markets, also it is important in the number of situations where problems are faced by the organization.

There are various empirical evidences that suggest the downside beta that capture the market relationship between the risk for the better purpose, and this result in the development and the emergence of financial market.

In the research report, it has widely discussed the core implication suggestions in the utilization of downsize beta on valuation as well as in detail it is discussed and illustrates the application for both diversifies and un diversified risk of the investors.

Introduction

The asset pricing model is used to price the financial asset of the organization. The asset pricing model has the capability to itself design the mechanism of pricing in the complex financial markets, also it is important in the number of situations where problems are faced by the organization and individual persons such as.

Allocation of asset: where the combination of various financial assets is put in the portfolio by the institutional investors and individuals.
Financial risk being measured by the management, such as in various financial institutions and corporate banks.
The decision regarding the capital budgeting executed by the firm
The decision regarding the capital structure executed by the firm
The mitigation and determination of a conflict of interest that arise among the stakeholder of the organizations, example of stakeholder conflict of interest is the interest of shareholder's vs.creditors, and the interest of managers and shareholders.

The control being imposed by the government and central banks to control the financial markets, which include determining the interest rates or limiting the stock market volatility. Along with the control, the proper knowledge of the asset pricing mechanism and the relation between macro-economic and financial market should be understood by the central banks and government. There is also the area where the accounting regulation trend towards the market oriented asset and liability valuation is used instead of using the traditional valuation at historical cost(Ma, n.d.).

The elements of asset pricing models are as follows:

ASSETS

Current price and the future payments over which the potential investor will be held accountable if he buys the asset is the important characteristic of a financial or other investment opportunity. The dividend is paid over the proportion of shareholding of the company by the shareholders. The dividends will wholly depend over the performance of the organization. The repayment ofthe debt that is outstanding and the capon rate is delivered by the bond, usually these payments are certain which means that they are risk free. The uncertainty of the dividend of an asset at the point specified is naturally followed by the random variable. The collection of random variable will be required when the owner of the asset is provided with the payments at several points. Thus, this process of collection of random variables is known as stochastic process.

A stochastic process is the way to determine the flow of dividends, which are exposed to the uncertainty of an asset over the time of its life.

Advance Asset Pricing Model Case Solution

INVESTORS

The domain of investors contains a wide variety of stakeholders, such as banks, brokerage firm, etc. the trading that is done on behalf of the individuals iscarried by the institutional investors; these individuals could be anyone, either customers or shareholders. In order to finance the investment in the production technology, productive firms issue stock and bonds that they perceive it will generate the highest returns and earning to the shareholder in the near future.

If the investor is not capable of making the investment, then it will be impossible for him to consume more than his wealth, as he will miss the opportunity to generate higher income from the investments. The consumption opportunities that are drifting from one point to another point is allowed by the financial markets.

Equilibrium

For any dividend process, the price will be considered as reasonable if it stays within the equilibrium. There are two characteristics of the equilibrium