Explain the test by Litzenberger and Ramaswamy of the Post-Tax (i.e. after-tax) form of CAPM.

Question - (i) Explain the assumptions made when testing CAPM through regressions.

Answer - Assumptions made when testing CAPM through regressions. The first assumption is that clients like higher returns than the risk rate. Secondly, the added indexes have been tested as complex things that regard become and the more accurately in the historical correlation matrix is that is reproduced. However, in the real sense of regression of CAPM, this doesn't imply, and therefore, the future correlation of the matrices will be direct forecast much more accurately. Although more complex models exist, they are better described in the correlation of historical data. Mostly it is noted that they introduce much noise in the event of prediction.

(ii) Explain the test by Litzenberger and Ramaswamy of the Post-Tax (i.e. after-tax) form of CAPM.

Answer - Ramaswamy and Litzenberg (1979) argued the tax rate on higher dividends than the capital gain tax rate. Therefore, a firm that high pay dividends that will have the n a lower value have shareholder pay added on dividends. On the other hand, it was observed that there is a weak relationship positive on policies of the value retarted to different sectors.

The main theory effect theory advanced by the Ross (1977) stated that in an inefficient market, could management use policies dividends to signal information related to important market that is known to them; for instance, if management offers higher pay on dividends, it indicates signals high that is expected profits that are to be maintained in future to maintain dividend level. On the other hand, high dividend announcements possibly firm value reflect because of efficiency that is weak form e ( hypothesis of the efficient market) in the markets developing.

The relation between dividend and price announcements is mainly on 16 announcements that influence the investor's expectations. Most inventors prefer dividends on the retained earnings cause of earning they fear that retained might be very used in the benefits.

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Explain the test by Litzenberger and Ramaswamy

Explain the momentum effect

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