Canbetacoefficientbecomeatoolforarbitrageinthecapitalmarket.docx

CanBetaCoefficientBecomeaToolforArbitrageintheCapitalMarket?1. IntroductionCapitalassetpricingandinvestmentprofitareimportantissuesintheinvestmentfield.Sincethebetacoefficientarbitragestrategywasproposed,thismethodhasbeenwidelyconcernedbyinvestors(Polk,2015).Thispaperfurtherconsidersthisstrategy.Inthefirststep,thispaperintroducesthebasicprincipleofbetacoefficient-capitalassetpricingmodel.Thecapitalmarketpricingmodelisbasedonthehypothesisofrationalpersonandthehypothesisofcapitalmarketeffectiveness.Itrequiresinvestorstoscientificallyinvestinassetportfoliobycomprehensivelyconsideringassetriskandexpectedreturnoninvestment.Inthesecondstep,thispaperexpoundsthesignificanceofbetacoefficientandarbitragestrategy.Betacoefficientreflectsthesystematicriskofanasset,anditsessenceistoreflectthesensitivityofanassetorassetportfoliotothefluctuationofcapitalmarket.Investorscantakeadvantageofbetacoefficientarbitragebecausetheirleverageislimitedintheactualinvestmentprocess.Theymustpursuehigherriskassetportfoliotoobtainhigherinvestmentreturn,whichmakesthepriceofhigh-riskassetportfoliohigherandthereturnonassetinvestmentlowerthanthatoflow-riskassetportfolio,Inthisway,investorscangetexcessprofitsbylonglow-riskassetportfolioandshorthigh-riskassetportfolio.However,thefactorsaffectingassetscanbesubdividedintomanysubfactors,especiallywhenthematurityoftheglobalcapitalmarketisdifferent,thesefactorswillmakethecalculationofassetreturnmorecomplex.Thissituationmaymakethebetacoefficientarbitragestrategydevelopfromonebetacoefficienttomultiplebetacoefficients.2. BasicprincipleofbetacoefficientBetacoefficientcomesfromcapitalassetpricingmodel,whichisbasedoncapitalmarkettheoryandassetportfoliotheory.Itevaluatesthevalueofassetsandthereasonablepriceofpurchasingassetsbystudyingtherelationshipbetweenassetrisk,assetequilibriumpriceandassetexpectedrateofreturn(Eisele,2012).Whentheassetvalueishigherthanthemarketprice,investorsshouldbuyassets,andwhentheassetvalueislowerthanthemarketprice,investorsshouldshortassetsintime.Capitalassetpricingmodeliswidelyusedinthefieldofinvestmentandfinancialmanagement(Hecht,2012).Thepreconditionsfortheestablishmentofthecapitalassetpricingmodelarethefollowingassumptions:first,investorswanttoobtainmorewealth.Themorewealth,thegreatertheutilityofinvestors,andthewealthisdeterminedbytherateofreturnoninvestment(Cazalet,2013).Secondly,thecapitalmarketiseffective,therateofreturnoninvestmentisthesameastheprobabilityknownbyinvestorsinthemarket,andthereisnointernalinformationandstockpricemanipulationinthemarket.Third,themethodandstandarddeviationofinvestmentreturncanbeusedtomeasureinvestmentrisk(Faff,2014).Fourth,investorsmainlyconsidertwofactors:investorriskandexpectedrateofreturn.Inaddition,thecapitalassetpricingmodelalsomakesthefollowingrestrictions:first,investorscanborrowfundsatarisk-freediscountratewithoutrestrictions,andthefundlenderwillnotraiseobjections.Second,allinvestorsinthemarkethavethesameanalysisandconclusionontheprobabilitydistributionofsecuritiesreturn,andtheinvestmentperiodisthesame,thatis,everyonekeepstheinvestmentperiodasoneperiod,sothereisonlyoneeffectiveboundaryinthecapitalmarket(Richard,2015).Third,transactioncosts,taxes,inflationandotherfactorscanbeignored,andinvestors'expectedrateofreturnisthesame.Fourth,allsecuritiesinvestmentsinthemarketcanbeinfinitelysubdivided,sothattheportfoliocanbecomeveryflexible.Onthebasisofmeetingtheaboveconditions,thecapitalassetpricingmodelbelievesthattheexpectedrateofreturnofeachsecurityiscomposedofrisk-freeinterestrateandmarketriskpremium(Blitz,2013).Riskfreeinterestratemeansthatthepurchaseofanykindofsecuritieswillgetvaluereturn,andthemarketriskpremiumisrelatedtotheinvestmentriskofeachsecurities.Securitieswithdifferentinvestmentriskswillreflectdifferentmarketriskpremium.Undernormalcircumstances,thegreatertheinvestmentrisk,thehigherthemarketriskpremium(Malkiel,2014).Inthisway,thecapitalassetpricingmodelcanbeexpressedasE(ri)=rf÷im(E(rm)-rf),wherefrepresentstherisk-freeinterestrateinthecapitalmarket,E(rm)representstheexpectedreturnofmarketinvestorsonsecurities,andthedifferencebetweenthetwoisthemarketriskpremiumofsecurities,imrepresentsthesystemicriskofassetI.Ofcourse,weknowthattheassumptionsofcapitalassetpricingmodelcannotbefullyestablished.Firstofall,thecapitalmarketcannotbecompletelyeffective.Forexample,China'scapitalmarketcanbecalledaninvalidmarket,whereinternalinformationisrampantandstockpricesaremanipulatedfromtimetotime.Thestatusofstate-ownedenterprisesandprivateenterprisesinthecapitalmarketisnotconsistent.Someinstitutionswantonlymanipulatethestockpricebyrelyingontheirowncapitalandinformationadvantages.Theexpectedrateofreturnofinvestorsinthecapitalmarketcannotbecompletelyconsistentwiththeinvestmentperiod(Amenc,2015).However,thecapitalassetpricingmodelstillhasguidingsignificanceforcapitalmarketinvestmentdecision-making.3. Betacoefficientandbetaarbitragestrategy4. IBetacoefficientBecauseweneedtousethebetacoefficienttocarryoutarbitrageinthecapitalmarket,wewi