Asset Pricing Sample Essay

In this sample essay, we shall be looking at the topic of Asset pricing. It quite an important concept for students of finance. Thus, we shall be discussing this concept in great detail. So without further adieu:

Asset pricing: Overview

Asset pricing is not a term you hear every day. For it is native to the financial realm. As such it is considered an important and equally vast concept. But before moving any further, we must first understand what Asset pricing is. Its definition goes as follow:

The term “Asset pricing” is a Financial economic concept that concerns the two main principles of pricing. In addition, it also refers to formal development and treatment of the same.

Moreover, Several different models concerning asset pricing. But all of these theories and models arise from two basic concepts. There are namely:

• General equilibrium asset pricing
• Rational asset pricing

We shall be looking at both of these in detail in the next section of the sample essay.

General equilibrium asset pricing

The General equilibrium theory pricing depends on the supply and demand or market pricing to determine the asset pricing. Here, prices are considerably affected by macroeconomic factors. In this theory. asset prices fulfill the asset supplied quantity as well as the demanded quantity that is at an equal price.  It is known as “Market clearing”

Moreover, this theory rose from the modern portfolio theory, along with the CAPM or capital asset pricing model. We shall be discussing the CAPM in detail later on. In addition, these models’ main goal is to model the probability distribution of the market price. Plus, this market price covers all of the securities concerning future investment. Thus, we can consider them “Large dimension”,

Moving on, we shall be looking at the Rational Asset Pricing theory in the next section of the sample essay.

Rational asset pricing

The rational asset pricing concept mainly concerns with the calculation of Derivative price. Moreover, calculations are, as such that they are arbitrage-free while taking into consideration the equilibrium determined securities prices.

This concept does not look at the assets as a group rather it establishes a unique risk price for each one. Thus, in contrast, General equilibrium theory is  “low dimension”

Furthermore, Rational pricing is used as an instrument of fixed income. For instance, bonds that hold a single asset as well as the modeling or interest rate. Moving on, we shall be discussing the CAPM in the next section of the sample essay.

Capital asset pricing model

In this section of the sample essay,  we shall be looking at the CAPM or the capital asset pricing model in detail. As such, it is the most widely and commonly used model for the Asset pricing model at present. But this begs the question, what is CAPM? The definition is, mentioned below:

The CAPM short for Capital Asset Pricing Model determines the connections between the return expected and systematic risk of asset which are usually stocks. Moreover, this concept is widely used in risky securities’ pricing. In addition, it may also be used to generate returns expected from these assests.

Furthermore, there are two types of risks under this concept. These are:

• Systematic Risk
• Unsystematic Risk

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