Canbetacoefficientbecomeatoolforarbitrageinthecapitalmarket.docx

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1、CanBetaCoefficientBecomeaToolforArbitrageintheCapitalMarket?1. IntroductionCapitalassetpricingandinvestmentprofitareimportantissuesintheinvestmentfield.Sincethebetacoefficientarbitragestrategywasproposed,thismethodhasbeenwidelyconcernedbyinvestors(Polk,2015).Thispaperfurtherconsidersthisstrategy.Int

2、hefirststep,thispaperintroducesthebasicprincipleofbetacoefficient-capitalassetpricingmodel.Thecapitalmarketpricingmodelisbasedonthehypothesisofrationalpersonandthehypothesisofcapitalmarketeffectiveness.Itrequiresinvestorstoscientificallyinvestinassetportfoliobycomprehensivelyconsideringassetriskande

3、xpectedreturnoninvestment.Inthesecondstep,thispaperexpoundsthesignificanceofbetacoefficientandarbitragestrategy.Betacoefficientreflectsthesystematicriskofanasset,anditsessenceistoreflectthesensitivityofanassetorassetportfoliotothefluctuationofcapitalmarket.Investorscantakeadvantageofbetacoefficienta

4、rbitragebecausetheirleverageislimitedintheactualinvestmentprocess.Theymustpursuehigherriskassetportfoliotoobtainhigherinvestmentreturn,whichmakesthepriceofhigh-riskassetportfoliohigherandthereturnonassetinvestmentlowerthanthatoflow-riskassetportfolio,Inthisway,investorscangetexcessprofitsbylonglow-r

5、iskassetportfolioandshorthigh-riskassetportfolio.However,thefactorsaffectingassetscanbesubdividedintomanysubfactors,especiallywhenthematurityoftheglobalcapitalmarketisdifferent,thesefactorswillmakethecalculationofassetreturnmorecomplex.Thissituationmaymakethebetacoefficientarbitragestrategydevelopfr

6、omonebetacoefficienttomultiplebetacoefficients.2. BasicprincipleofbetacoefficientBetacoefficientcomesfromcapitalassetpricingmodel,whichisbasedoncapitalmarkettheoryandassetportfoliotheory.Itevaluatesthevalueofassetsandthereasonablepriceofpurchasingassetsbystudyingtherelationshipbetweenassetrisk,asset

7、equilibriumpriceandassetexpectedrateofreturn(Eisele,2012).Whentheassetvalueishigherthanthemarketprice,investorsshouldbuyassets,andwhentheassetvalueislowerthanthemarketprice,investorsshouldshortassetsintime.Capitalassetpricingmodeliswidelyusedinthefieldofinvestmentandfinancialmanagement(Hecht,2012).T

8、hepreconditionsfortheestablishmentofthecapitalassetpricingmodelarethefollowingassumptions:first,investorswanttoobtainmorewealth.Themorewealth,thegreatertheutilityofinvestors,andthewealthisdeterminedbytherateofreturnoninvestment(Cazalet,2013).Secondly,thecapitalmarketiseffective,therateofreturnoninve

9、stmentisthesameastheprobabilityknownbyinvestorsinthemarket,andthereisnointernalinformationandstockpricemanipulationinthemarket.Third,themethodandstandarddeviationofinvestmentreturncanbeusedtomeasureinvestmentrisk(Faff,2014).Fourth,investorsmainlyconsidertwofactors:investorriskandexpectedrateofreturn

10、.Inaddition,thecapitalassetpricingmodelalsomakesthefollowingrestrictions:first,investorscanborrowfundsatarisk-freediscountratewithoutrestrictions,andthefundlenderwillnotraiseobjections.Second,allinvestorsinthemarkethavethesameanalysisandconclusionontheprobabilitydistributionofsecuritiesreturn,andthe

11、investmentperiodisthesame,thatis,everyonekeepstheinvestmentperiodasoneperiod,sothereisonlyoneeffectiveboundaryinthecapitalmarket(Richard,2015).Third,transactioncosts,taxes,inflationandotherfactorscanbeignored,andinvestorsexpectedrateofreturnisthesame.Fourth,allsecuritiesinvestmentsinthemarketcanbein

12、finitelysubdivided,sothattheportfoliocanbecomeveryflexible.Onthebasisofmeetingtheaboveconditions,thecapitalassetpricingmodelbelievesthattheexpectedrateofreturnofeachsecurityiscomposedofrisk-freeinterestrateandmarketriskpremium(Blitz,2013).Riskfreeinterestratemeansthatthepurchaseofanykindofsecurities

13、willgetvaluereturn,andthemarketriskpremiumisrelatedtotheinvestmentriskofeachsecurities.Securitieswithdifferentinvestmentriskswillreflectdifferentmarketriskpremium.Undernormalcircumstances,thegreatertheinvestmentrisk,thehigherthemarketriskpremium(Malkiel,2014).Inthisway,thecapitalassetpricingmodelcan

14、beexpressedasE(ri)=rfim(E(rm)-rf),wherefrepresentstherisk-freeinterestrateinthecapitalmarket,E(rm)representstheexpectedreturnofmarketinvestorsonsecurities,andthedifferencebetweenthetwoisthemarketriskpremiumofsecurities,imrepresentsthesystemicriskofassetI.Ofcourse,weknowthattheassumptionsofcapitalass

15、etpricingmodelcannotbefullyestablished.Firstofall,thecapitalmarketcannotbecompletelyeffective.Forexample,Chinascapitalmarketcanbecalledaninvalidmarket,whereinternalinformationisrampantandstockpricesaremanipulatedfromtimetotime.Thestatusofstate-ownedenterprisesandprivateenterprisesinthecapitalmarketi

16、snotconsistent.Someinstitutionswantonlymanipulatethestockpricebyrelyingontheirowncapitalandinformationadvantages.Theexpectedrateofreturnofinvestorsinthecapitalmarketcannotbecompletelyconsistentwiththeinvestmentperiod(Amenc,2015).However,thecapitalassetpricingmodelstillhasguidingsignificanceforcapitalmarketinvestmentdecision-making.3. Betacoefficientandbetaarbitragestrategy4. IBetacoefficientBecauseweneedtousethebetacoefficienttocarryoutarbitrageinthecapitalmarket,wewi