Implementation of the CAPM Model in Equity Price Determination in the Republic of Srpska

Abstract

CAPM (Capital Assets Pricing Model) has been developed by William Shape, John Lintner and Jan Mossion in the early 1960s, on foundations of earlier works of Harry Markowiz and the model it self is in the core of economics’ theory and modern finance. Model was introduced by William Shape, who received Nobel prize in economics in 1990. This model of equity assessment enables investors to forecast precise risk and yield relation in financial instrument and it is being used in three main purposes. First, enables investors to calculate the expected rate of return of financial instrument. Second, CAPM assist in share price determination in initial public offering (IPO). Third use of CAPM is determination of equity price as own source of funding. Although the model is not empirically verifed and it is the subject of critiques by some authors, its use is broad because of precise determination of risk and yield relation in financial instruments and his appropriate accuracy.

Keywords

• cost of equity capital
• systemic risk
• unsystematic risk
• the beta coeffcient