Review of The augmented CAPM Literature Example | Topics and Well Written Essays - 4000 words

Of The augmented CAPM - Literature review Example was criticized by various authors and a new augmented CAPM was devised in order to take systematic risk into account while investing in stock market and completely ignore the unsystematic risk. This augmented CAPM is accurate for applying in the Hong Kong market and thus, its validity is checked through this literature (Hearn, n. d.). Asset pricing models are defined as frameworks that are devised for identifying and measuring risk. The models also identify the rewards that are attached with risk bearing. The theories attached to the models helps in realizing reasons for expected returns on the government bonds to be less than that on the stocks. It also assists in developing idea behind two stocks with different expected returns. The change in expected returns over time is also explained through this model (Hearn, n. d.; Huang, Yang and Hu, 2000). The basic premises of asset pricing model are that the investor’s desires for higher expected returns. The investors do not like to take risk and hold diversified portfolios so that the risk is distributed in different sectors. The models also specify fair rate of return for particular asset. The information regarding rate of return is very crucial for taking any investment decision for corporations who evaluate projects and the formation of portfolios for inves tors. The theories related to models helps in characterizing the risk of a project or acquisition and also examine the discount rate associated with the risk. The asset pricing model was first developed by Sharpe (1964) and Lintner (1965). However, there had been lot of advancement in asset pricing for the past 35 years. The progress was important for understanding the issues encountered while implementing asset pricing models in any emerging market. So, this model should be followed and also modified over time, while investment situation changes due to several challenges. The first asset pricing theory is known as Capital Asset Pricing Model (CAPM) developed