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Can we replace CAPM and the Three-Factor model with Implied Cost of Capital?
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Business Studies.
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Business Studies.
2014 (English)Independent thesis Basic level (degree of Bachelor), 10 credits / 15 HE creditsStudent thesis
Abstract [en]

Researchers criticize predominant expected return models for being imprecise and based on fundamentally flawed assumptions. This dissertation evaluates Implied Cost of Capital, CAPM and the Three-Factor model abilities to estimate returns. We study each models expected return association to realized return and test for abnormal returns. Our sample covers the period 2000 to 2012 and includes 2916 US firms. We find that Implied Cost of Capital has a stronger association with realized returns than CAPM and the Three-Factor model. Implied Cost of Capital also has lower abnormal returns not accounted for by expected returns. Our results suggest that we can replace CAPM and the Three-Factor model with Implied Cost of Capital.

Place, publisher, year, edition, pages
2014. , 29 p.
Keyword [en]
Implied Cost of Capital, CAPM, Three-Factor model, expected returns, abnormal returns
National Category
Business Administration
Identifiers
URN: urn:nbn:se:uu:diva-218071OAI: oai:DiVA.org:uu-218071DiVA: diva2:694734
Subject / course
Business Studies
Educational program
Ekonomie kandidatprogrammet
Supervisors
Available from: 2014-02-10 Created: 2014-02-07 Last updated: 2014-02-10Bibliographically approved

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CiteExportLink to record
Permanent link

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Citation style
  • apa
  • ieee
  • modern-language-association
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf