CAPM and DGM of Risk Beta and Rate of Return within

        CAPM and DGM is the valuation tools that ultimately decides upon reaching the intrinsic value, CAPM indicates the rate of return that is required for the valuation. It is also a factor that evaluates the intrinsic value of stock.

        CAPM is the model for capital assets and it explores the relationship between the risk of a security and the returns. It can be seen that the risk and returns are positively related. So the formula for CAPM is

    So it can be seen that CAPM also induces the positive relationship. The overall analysis determines that the required rate of return, equals the risk free return and risk premium, that is a product of premium and beta.

        This is the rate that determines the rate of return of a stock, and it also determines the potential returns on each stock. This is a measure that is comparable between companies, and it is also a rate that leads to calculation of Weighted Average Cost of Capital. The potential is based on the values of the required stock. It also encompasses the values related to each of the above variables. So if the rate of return is higher it can be said that the company is more fit for investment. And if the stock is not fit for investment, there is a low variation in the stock values.

        Moving on, it can be said that the that this provides the basis for DDM Model. Dividend Discount Model, is the model that works on the basis of pricing the intrinsic value of stock. The  valuation provides the basis for computation of the final decision making. It is based on the discounted values of all future dividends, there are various approaches to the factors that determine the rate, this involves the previous growth rate, the present dividend to determine the intrinsic value. This involves the present value and the rate of discount in order to evaluate. It can be said that the value of each stock has been determined, the potential reasoning is based on the factors compiling the variables.

    Since the stock and its dividends are perpetual and also incorporates growth as well, the simple formula for valuation in a single period is determined by the following formula

It can be seen that the potential is the determination of rate of return. It can also be seen that the growth can be divided into various growth stages. It can be seen that every dividend is calculated in each phase of growth. It can be said each of this is discounted to the present value and the last is considered a perpetuity. This is termed as the present values and when these present values discounted to zero period are all totaled, the sum is then referred to as the sum of all values, and this sum is the intrinsic value of the share. The valuation is defined as intrinsic value of share by Dividend discount model (García 2017).

This is a simple but effective measure of calculating the intrinsic value and determining, whether to purchase or not to purchase the stock in a given scenario. This would be a primary source of determination of the stock price and whether the stock price would increase or decrease in the given scenario (Pandey 2015).

Beta and its role of  CAPM and DGM

        Beta of a company is the primary source of riskiness that exists in a company, the higher it is the higher is the risk level of the company, so in an optimized situation the best available beta is the lowest one, as it is considered to be the least risky.

        Beta in its true self is the level of reaction that the company faces when it deals with the market index, it is considered to be moving with the market index, if it is 1, this indicates that if there is a 1% change in market index, or the market as a whole the beta would change accordingly. The beta denotes this, if it is 0.91 it denotes that if the market changes by 1%, there is a 0.91% change in the stock price of the company. Similarly, if the beta is 1.1, it can be said that per percent change in the market index, there is 1.1% change in the stock price in similar direction (Erickson 2014).

        Therefore, beta is an indicator of change and it can be determined that beta in itself is a measure of the change the market has on the stock price of the company. The measure that effects this average vividly is a metric that is also termed as riskiness.

        Normally beta is determined on the basis of the market index of that country, for example, in a company that operates in USA, is termed with S&P 500 or Dow Jones indexes, in terms of a company from UK the index that is used is FTSE. In an overall perspective every country and economy has its own index and it matches itself with that index. And when the stock return is regressed with the market returns, the beta for that company is obtained (Higgins 2007).

References of Risk Beta and Rate of Return within the CAPM and DGM

Erickson, K.H. 2014. Financial Risk Management: A Simple Introduction. K.H. Erickson.

García, Francisco Javier Población. 2017. Financial Risk Management: Identification, Measurement and Management. Springer.

Higgins. 2007. Analysis for Financial Management. Tata McGraw-Hill Education.

Pandey, I.M. 2015. Financial Management. Vikas Publishing House.