Reference no: EM132558509

Critique my analysis that I have listed below. Compare any similarities that you would have in analysis.

The CAPM investment theory calculates the relationship between the expected return and the market risk. The beta or "Ba" of the formula is the measurement of the stock's risk, calculated by its price changes relative the overall market changes. It's an analysis tool of the expected return of the market, calculated with the stock's risk (Learn to Invest, 2018). According to eFinanceManagement (2019) it is overall an easy to use tool and calculation if you are looking for an investment appraisal and systematic risk. It can help you determine the potential return on the investment in a positive market, and the risk when you use it to calculate NPV.

The weighted average cost of capital (WACC) tells you a company's capital in a calculation where you include stock, bonds and long-term debts. You can use the CAPM to estimate the cost of equity, which than can be used to calculate the WACC. This tells you whether the return on investment can meet or exceed the companies cost of invested capital, or the discount factor.  The difficulty in using CAPM is that the calculation relies on assumptions about the financial market, and in most cases seems unrealistic. It assumes that the financial market holds steady and can be relied upon for return. The benefits to using CAPM is that it can link the required return to the systematic risk, while a drawback would be that there are unrealistic assumptions and assignments to variable such as the assumption that the company would be able to borrow with a risk-free rate.