Document Type Master's Dissertation Author Van der Berg, Gerhardus Johannes URN etd-07172011-152729 Document Title The relationship between the future outlook of market risk and capital asset pricing Degree MBA Department Gordon Institute of Business Science Supervisor
Advisor Name Title Ms T Pieterse Committee Chair Keywords
- investment finance
- maket derived capital pricing model
- implied beta
- implied cost of capital
- three factor pricing model
Date 2011-04-12 Availability unrestricted Abstract
The most widely used Cost of Capital model is the Capital Asset Pricing Model. The Beta, Which is a key input into the model has proven to be unreliable and provides no correlation with systematic risk. As risk increases, so should the cost of capital of the firm. The Beta is a historic measure of risk and does not capture the future outlook of risk. The future of an organisation and its risk may look very different to the past and therefore the need to calculate the Cost of Capital of a firm based on the future outlook of the firm. The aim of this research was to analyse the different methodologies used to determine the Cost of Capital of a firm in order to determine which models are better ex ante predictor of Cost of Capital in the South African context. Regression analysis was used to make statistical inferences between the measure of risk used and the Cost of Capital model in question. The results of the research has shown that Market Capitalisation and Price to Book ratio are the best proxies for risk when comparing it with the ex ante Cost of Capital models. However, the Three Factor Pricing Model is shown to be the best Cost of Capital model to capture the future outlook of risk.
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Please cite as follows:
Van der Berg, GJ 2010, The relationship between the future outlook of market risk and capital asset pricing, MBA dissertation, University of Pretoria, Pretoria, viewed yymmdd < http://upetd.up.ac.za/thesis/available/etd-07172011-152729 / >
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