Analysis of capital asset pricing model on Deutsche bank energy commodity

Tolulope Latunde · Lukman Shina Akinola · Damilola Deborah Dare

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Market Dynamics and Volatility

Abstract

Capital asset pricing model (CAPM) is one of the widely used asset pricing models in modern securities theory. This mathematical model can help investors understand the relationship between expected returns and investment risk. To help energy commodity investors (especially Deutsche Bank) make the best decisions in investment management, this paper uses the CAPM and some statistical tools (variance, covariance and mean) to study risks on the expected return of investing in four common Deutsche Bank (DB) crude oil assets (DB crude oil double short, SZO-DB crude oil short order, OLO-DB crude oil short position, DBO-Invesco DB Petroleum Fund). The result reveals that DTO-DB Crude oil Double Short has the highest beta risk and highest expected return. And the higher the risk, the higher the expected return, and vice versa, that is, the risk is directly proportional to the expected return. In addition, the results also show that 73% of the investoros wealth can be spent on a risky asset in DTO-DB Crude oil Double Short, 67% in SZO-DB Crude oil Short, 16% in OLO-DB Crude oil Short. Since the expected returns of DBO-Invesco DB Crude oil fund has a negative risk with negative expected returns, the investment in DBO-Invesco DB Crude oil will result in having a loss from the investment.

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References

1986Generalized autoregressive conditional heteroskedasticity 1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 1992The Cross-Section of Expected Stock Returns 1973Risk, Return, and Equilibrium: Empirical Tests 1921Risk, Uncertainty and Profit 1965The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets 1976The arbitrage theory of capital asset pricing 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]

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