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馃敶 UGLIEST, old but EASIEST CAPM Capital Asset Pricing Model, What is CAPM Explained (Skip to 1:30!) - YouTube
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CAPM Capital Asset Pricing Model in 4 Easy
Steps - What is Capital Asset Pricing Model
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Explained
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Hello I鈥檓 back and welcome once again to
another easy lesson or review or tutorial
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by MBAbullshit.com.
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So, today or this time our topic will be on
or about CAPM or the Capital Asset Pricing
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Model in the field of finance or Financial
Management.
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Management sounds scary or complicated but
don鈥檛 worry this is just MBAbullshit.
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And we can cut through the bullshit and you
can see how easy and simple it actually is.
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Okay, just remember you can always come here
whether you鈥檙e a business student, college
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BBA or MBA or if you鈥檙e an executive who
just wants to learn because you don鈥檛 have
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time for MBA or because you need refresher
from your previous MBA or if you鈥檙e a non
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business moron like me before and maybe an
artist, or a creative person or a doctor and
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you just want to learn the concepts of MBA
quickly and easily.
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You can always go to MBAbullshit.com for lots
of free video.
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Okay?
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So now, let鈥檚 go to the Capital Asset Pricing
Model.
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Now, most professors will explain the Capital
Asset Pricing Model or CAPM as a formula which
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looks like this: Ke = Rf + B (Rm-Rf).
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Now, I know this formula over here can look
scary and intimidating but please do not panic
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because this is actually very simple when
I show you step by step how easy it actually
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is.
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So, don鈥檛 worry about it but in order to
allow you to understand it well, I want you
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to first remove this first complicated bull
shit from your brain right now temporarily.
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We鈥檒l get back to it later.
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Remove it from your brain, don鈥檛 panic and
I just want you to focus on this other thing
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I鈥檓 going to show you now.
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Okay?
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You鈥檙e going to see, it鈥檚 not complicated
at all.
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So, I鈥檓 going to start by telling you a
story and in the story I鈥檓 going to give
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you a choice.
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Let鈥檚 say, I offered you a risk free investment.
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Okay?
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It was an investment or it鈥檚 an opportunity
for you to earn money by putting your money
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in my bank.
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You have a deposit account in my bank and
my bank is guaranteed by the government and
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so therefore it is risk free, zero risk and
for sure the bank will not collapse like what
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happened in the recent economic crisis.
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In this case you鈥檙e 100% sure that the bank
would not collapse.
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And you have the opportunity, you have the
offer to deposit your money in this bank and
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the bank will give you an interest of 2%.
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So the 2% here is what we called the risk
free rate.
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So let鈥檚 just say that you can put your
money in my bank, my bank has no risk and
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you can earn 2% interest or 2% income or 2%
profit on your money by depositing that money
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with this bank.
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And then I give you a second choice with an
investment which has medium risk.
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And for this example, let鈥檚 just use or
let鈥檚 just say that the United States stock
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market, the general stock market has medium
risk.
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So bank here, the bank deposit has no risk
or zero risk and the US general stock market
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has medium risk which is also called systematic
risk.
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Now, don鈥檛 worry so much about the systematic
risk here.
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This is just MBAbullshit and for now let鈥檚
just use the word medium risk and we can get
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back to the systematic risk later.
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It鈥檚 called systematic risk because it represents
the risk of a certain system which is usually
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used such as the United States stock market.
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But if you don鈥檛 understand what I just
said don鈥檛 worry about it, just forget it
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for now.
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For now let鈥檚 just say it鈥檚 medium risk.
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Now, what if I also offered you a risk free
investment, zero risk investment or deposit
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earning 2% and I also offered you a medium
risk investment?
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And this medium risk investment would earn
you also 2%.
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It would also earn you 2%.
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So if you had to choose between this investment
here or this investment here, which one would
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you choose?
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Which one?
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They earn the same amount but this one has
higher risk than this.
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Well if you have at least some intelligence
then for sure you would choose this investment
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and not this one.
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Why?
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Because in this investment you earn 2% but
you have no risk.
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In this investment you also earn the same
small profit of 2% or you expect to earn the
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same small profit of 2% but you have even
higher risk compare to this one over here.
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So of course it makes much better sense to
put your money here in the no risk investment.
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Let me ask you; let鈥檚 say I was a stock
broker who trades stocks in the United States
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and I want to convince you to move your money
away from here and instead put your money
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here.
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How would I do that if I鈥檓 only giving give
you 2%?
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Well, of course the normal way would be for
me to try an offer you more than 2% and I鈥檇
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tried to offer you extra money, extra profit
or extra percentage here.
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That way it would be worth it for you to move
your money from here to here because now you鈥檙e
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earning more profit in order to pay you for
the extra risk.
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For this example, let鈥檚 just say I鈥檇 offer
you an extra 6% return or extra 6% profit
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on your money to place your money here instead
of here.
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So now, these two investments have equal attractiveness,
let鈥檚 just called it equal attractiveness
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because here you only earn 2% but you鈥檝e
got no risk, here you earn 2% plus 6% but
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you have medium risk and medium risk is more
than no risk.
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So now, these 2 choices should have equal
attractiveness.
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