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Originally Posted by New billionaire
Dear Akula,
Thanks a lot for your explanation. It is really meaningful especially your comments about the stock market as a type of ponzi scheme if it is without regulations.
By the way, I really don't aware or even don't know wha tis CAPM. Care to enlighten? Thanks.
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Sure.
This thread is about "what is a fair rate of return"?
Some people think that when being offered of a projected return of 1-2% per day, the offer is unrealistic (i.e. it's too good to be true), still, others in comparing the opportunity to even more outrageous offers propose that the offer is a good one (i.e. "7% weekly or 1-2% daily it isnt a scam").
The capital asset pricing model resolves all of these disputes. CAPM is useful because it spits out a number for what
investors should expect from investing in financial assets like bonds, stocks and everything else including HYIP. Is 7% weekly too high? Too low? CAPM knows.
Using CAPM, you can instantly determine whether a projected return of 1-2% is too high and the degree of risk you should expect to assume if you expose your self to an opportunity which promises these kinds of returns.
It's all very simple: if the Federal Government promises to pay you ~4% for lending it money for a year (i.e. buying a treasury bill), and this constitutes a risk free rate of return (because the Government's ability to repay a loan is guaranteed by the tax payers), then what should a HYIP scheme pay if t-bill has no risk and pays 4% (or, what should MSFT shares, Spanish pesos, commercial real estate in Virginia, or any kind of other financial asset pay)?
That's what CAPM is. It's an equation. You plug the numbers in and it tells you if you're being bullshitted. Obviously, with projected rates of return of way over 300% p.a. it's a certainty that you are either being sold a scam, or the chances of you seeing this payout should be about as high as seeing a payout on a lottery ticket.
the point: understanding CAPM is about understanding the relationship between risk, return and the individual investments within a universe of financial options. If the government is offering you ~4% p.a. on a risk free investment, and companies like IBM offer ~8% p.a. for lending them money for a small amount of risk, then how much risk can you expect from someone offering you > 300% p.a.?
This kind of analysis is more useful than blindly arguing things like "this is too high", "this is not too high" or "this is risky"
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