CAPM Exam

SEAOIL PHILIPPINES, INCORPORATED SCREENING TOOL FOR MANAGEMENT TRAINEE APPLICANTS NAME: LEO D. JAY BACARISAS Please answer the following !estions"  The Capital Asset Pricing Pricing M!el is tra!itinall" #se! $r pricing %nancial assets& assets& h'e(er& its applicatin is (ast. ). In the cnte*t cnte*t $ CAPM& !isc#ss !isc#ss the ris+,e*pecte! ret#r ret#rn n pr%le pr%le $ in!#stries speciali-ing in each $ the  le(els $ Masl'/s 0ierarch" $ Nee!s. Pr(i! Pr(i!e e e*a1ples $ in!#stries that $all 'ithin each each le(el. 

 The %(e le(els $ Masl'2s 0ierarch" $ Nee!s are ph"silgical& sa$et"& scial& estee1 an! sel$3act#ali-atin. There are speci%c in!#stries that $alls 'ithin each le(el. Ph"silgical nee!s in!#stries li+e $! an! !rin+s 1an#$act#rer. Sa$et" nee!s in!#stries li+e 4an+ !epsits r ins#rance. Scial nee!s in!#stries li+e telec11#nicatin. Estee1 nee!s in!#stries li+e sprts. Lastl" the sel$3act#ali-atin nee!s in!#stries li+e cine1a r theater theat er.. In gener general al in!#s in!#stries tries sp spec ecia iali li-i -ing ng in ea each ch $ th the e  le le(e (els ls $  Masl'/s 0ierarch" $ Nee!s can #se! CAPM t calc#late the e*pecte! ret#rn n a sec#rit" 4ase! n its le(el $ ris+. 5r e*a1ple& Le has a !epsit in a sa$et" 4an+ 'hich has an interest rate $ 6 then he has 4een 7ere! t 4e in(l(e! in a 4#siness $ $! an! !rin+s c1pan" 'hich als has an interest rate $ 6 i$ he 'ill 8in. Le '#l! nt in(est n that $! an! !rin+ c1pan" +n'ing the ris+ $ his in(est1ent. In(estrs can #se the CAPM $r1#la t !eter1ine i$ the in(est1ent is nt t ris+" t 4e in(l(e! 'ith. I$ !#ring the calc#latin $ the CAPM an! the res#lt is that the ris+ is nt t high then s#rel" the in(estr '#l! p#sh th thr r#g #gh h hi his s pl plan ans. s. Ea Each ch in in(e (est str r ch ch se ses s an in in(e (est st1e 1ent nt th that at 1a*i1i-es his r her #tilit". #tilit". This lea!s t an e9cient !istri4#tin $ ris+ in the th e ec ecn n1 1"& "& gi gi(e (en& n& $ c c#r #rse se&& th the e !i !ist stri ri4# 4#ti tin n $ 'e 'eal alth th a1 a1n ng g in(estrs in(es trs.. The CAPM the ther" r" 4rie 4rie" " e*pl e*plains ains that an in(estr c#l! ear earn n 1re nce he in(ests in ne stc+ than a ris+ier stc+.

;. 0' can "# appl" appl" the CAPM CAPM 1!el t Strateg" Strateg"&& Mar+eting Mar+eting an! 0R< 0R< 

=hen it c1es t strategic planning pr4le1 $ the %r1 in(l(es t' inter int er!ep !epen! en!ent ent !ec !ecisi isins ns.. 5irs irst& t& 1an 1anage age1en 1entt 1# 1#st st !ec !eci!e i!e 'hi 'hich ch 4#sinesses in the in(est1ent sh#l! 4e retaine! an! 'hich 4#sinesses sh#l! 4e re1(e!. Secn!& $r thse 4#sinesses retaine! in r a!!e! t the in(est1ent& 1anage1ent 1#st !eci!e n the a1#nt t 4e in(este! in each 4#siness. >n!er the CAPM $ra1e'r+& the pri1ar" strategic 48ecti(e $ 1anage1ent in 1a+ing these t' inter!epen!ent !ecisins is t 1a*i1i-e the e*pecte! (al#e $ the %r1/s c11n stc+. In Mar+eting an! 0R& CAPM 1!el can 4e #se! in r!er t !eter1ine the e9cienc" $ the ris+ the c1pan" is ging t engage i$ its rate $ 

ret#rn is higher than the initial then it2s 'rth !ing s. Speci%c e*a1ple $r 1ar+eting is 'hen "# 1ar+et a certain pr!#ct. Y# 1#st 1a+e s#re that the in(est1ent "# p#t t that pr!#ct 'ill 4e 'rth it. Y# 'ill nt engage int 1ar+eting that certain pr!#ct +n'ing that there is n ass#rance $ getting higher ret#rns $ "#r in(est1ent. >sing the CAPM then the ris+ an! the rate $ ret#rn can 4e !eter1ine!. Sa1e as in 0R& the" #se CAPM t !eter1ine the ris+ $  certain in(est1ent the c1pan" is ging t 4e in(l(e! in r!er t +n' ahea! $ ti1e i$ the in(est1ent is 'rth the ris+ r nt. ?. De%ne the CAPM para1eters nee!e! in r!er $r an ar4itrage t e*ist. 

Ar4itrage is the practice $ ta+ing a!(antage $ a price !i7erence 4et'een t' r 1re 1ar+ets. Stri+ing a c14inatin $ 1atching !eals that capitali-e #pn the i14alance& the pr%t 4eing the !i7erence 4et'een the 1ar+et prices. =hen #se! 4" aca!e1ics& an ar4itrage is a transactin that in(l(es n negati(e cash ' at an" pr4a4ilistic r te1pral state an! a psiti(e cash ' in at least ne state in ther 'r!s it is the pssi4ilit" $ a ris+3$ree pr%t at -er cst. Ar4itrage in(l(es the pssi4ilit" $ getting s1ething $r nthing 'hile ha(ing n pssi4ilit" $ lss. In r!er $r an ar4itrage t e*ist the in(est1ent "# in(est 1#st 4e ris+ $ree. One $ the CAPM para1eter is the ris+ $ree rate. B" !e%nitin ris+3$ree interest rate is the theretical rate $ ret#rn $ an in(est1ent 'ith n ris+ $ %nancial lss. One interpretatin is that the ris+3$ree rate represents the interest that an in(estr '#l! e*pect $r1 an a4sl#tel" ris+3$ree in(est1ent (er a gi(en peri! $ ti1e. S in r!er $r ar4itrage t e*ist the ris+ $ree rate 1#st 4e high.