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Managerial Analysis: Capital Asset Pricing Model vs. Discounted Cash Flows Method

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Contrast the Capital Asset Pricing Model (CAPM) with the Discounted Cash Flows Method (DCF).

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Managerial Analysis
Contrasting Capital Asset Pricing Model (CAPM) with the Discounted Cash Flows (DCF) Method.

The Capital Asset Pricing Model (CAPM) is a financial model that attempts to describe the "relationship between risk and expected return and that is used in the pricing of risky securities." What the CAPM attempts to describe or derive is the fact that investors usually have an expectation of compensation using two main ways. One of them is that they need to be invested in terms of the time they have utilized in tying down their resources within a certain investment. This is meant to be a compensation to cater for the opportunity cost of similar investments. On the other hand, investors need to be compensated for the risk they assume when they invest their money into a certain security. Based on the compensation based off the time-value of money, it is given that this is represented by the risk free (rf) rate, which is the rate assumed to compensate the investor for putting his money within any given investment (Capital Asset Pricing Method, 2011).

The risk free rate is usually hedged upon government securities, with the main ...

Solution Summary

This 725 word solution provides a detailed comparison of the capital asset pricing model (CAPM) with the discounted cash flows method (DCF). Additionally, this solution provides a complete list of reference sources for further investigation of the topic.

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