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ID number:839312
Published: 30.06.2008.
Language: English
Level: College/University
Literature: 20 units
References: Used
Time period viewed: 2000 - 2010 years
Table of contents
Nr. Chapter  Page.
  Introduction    6
1.  Brief overview of Financial Markets    8  Importance of Financial Markets    8  Participants of investment process    9  Risk and Return for Investors (diversification)    10
2.  Capital market theory: essence of 3 basic models    11  Markowitz model    11  Capital Asset Pricing Model – CAPM    14  Introduction    14  Definition    18  Assumptions of the CAPM on stock markets and financial assets    19  Application    22  Implications: strengths of the CAPM    29  Conclusion on the CAPM    31  Arbitrage Pricing Theory - APT    31  Comparison between APT and САРМ    32
3.  Empirical counterparts of models    35  Single-index model - CAPM    35  Multi-index model - APT    38
4.  Criticism and empirical analysis of the CAPM    42  The models—ex-ante expectations and ex-post tests    43  Empirical tests of the CAPM    44  Comparisons of traditional tests of general equilibrium relationships and some new research    49
5.  Baltic Stock Market: Overview    53
6.  CAPM tests on the Baltick Stock Market    68
7.  Conclusions and suggestions    71
8.  Bibliography (Lists of utilised literature and sources)    74
9.  Summary in Latvian    76


The Capital Market Theory is a widely researched area, and extensively is covered in publications over last 50 years. This theory is a fundamental base for understanding the investment processes in any market, and is concerned with finding the most desirable group of securities to hold, given the properties of each securities. There are 3 basic models of Capital Market Theory which are bases for later extensional models.
Almost everyone owns some kind or group (portfolio) of assets. These assets could likely be a real assets (such as a car, a house etc.) as well as financial assets such as stocks, bonds and so on. An investor is faced with a choice among all these assets, what means that the decision process seems to play an important role. The Capital Market Theory describes the basic principles underlying rational portfolio choice and its impact on assets prices in marketplace.
The Current Master Thesis is aiming at financial assets and markets, analyzing securities markets, specially focusing on stock markets as a whole with main emphases on Baltic stock market. The CAPM was taken as a basic model for investigation in Master Thesis, because it is the first model which has practical implication in real world.
The author has chosen the topic for two reasons mainly: first, because stock markets (in difference to other markets) provide opportunities and data readily available to all (small and big) investors. Secondly, because previously the model has not be tested on the Baltic market but in other markets.
The importance of the study is supported by the fact that the Baltic market is fast growing market and it is supposed to be very attractive to potential investors.

Goal and tasks of Master Thesis:
Aim of this research is to analyze and critically estimate the previous investigations, dedicated to the applicability of CAPM and to verify if CAPM holds also for the Baltic Stock Market.
To achieve the above- stated goal, the author of thesis has posed the following tasks:
1. To analyse the available scientific literature about Capital Market Theory’s 3 basic models
2. To estimate Capital Market Theory’s 3 basic models both theoretical and practical implication on the prediction of the pricing on stock markets.
3. Critically estimate the results of previous investigations, dedicated to the applicability of CAPM to stock markets.

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