Purpose of Using Financial Analysis Capm

Data

When managing and evaluating returns for a period by using the closing prices for a day, a week, a month, or a quarter. While the option to calculate them at different lengths of time exists the shorter the holding period, the more likely the data is to present random variances. Conversely, the greater the number of years of data used, the more likely it is that the subject company's risk position has changed.

Methodology of CAPM

The benchmark for a well-diversified stock portfolio is the market portfolio, which is a portfolio containing all stock. Therefore, the relevant risk of an individual stock, which is called its beta coefficient, is defined under CAPM as the amount of risk that the stock contributes to the market portfolio. (Bringham & Ehrhardt, 2005).

The purpose of using financial analysis CAPM is to provide the correct relationship that exists between beta coefficients, non-systematic risk, and returns. The general practice when doing this is to view the data in relation to 30-day Treasury bill rates and long-term Treasury bond rates. Using the treasury bill and bond data offers a bench-line estimate of the risk-free rate. (Bringham & Ehrhardt, 2005)

Beta

The calculation of beta in CAPM analysis is to gauge the measure of systematic risk in relation to company data. This practice also replaces the standard deviation as the measure of risk creating the security market line (SML). Using the information from calculating SML enables the determination of an asset's expected return in relation to its given beta. By definition, the formula used provides the portfolio's expected return and equals the rate earned on risk-free assets plus the amount of risk taken times the market risk premium.

SML

Theoretically every investment made should be done based on the data obtained from the SML. The equation used to calculate the SML yields what the return on an investment may be given its risk. The analysis provides a quantitative relationship between risk and return based in the belief that a measure of risk in a well-diversified portfolio is actually a contribution of an asset to the portfolio's variance that is measured by beta. In this definition, the SML is what serves as the benchmark for assessing the performance of an individual asset or the assets of an entire portfolio.

Results

Papa John's is an established corporation with substantial market capitalization. For the risk-free rate, the current 3.1% of a 30-year old Treasury yield was used. It is important when analyzing any financial asset to match the time horizon of the assets. Provided that stocks have essentially an endless time horizon, the 30-year Treasury provides a limiting factor for