Studies In The Theory Of Emotional Development

Studies In The Theory Of Emotional DevelopmentThe maturational touches and the facilitating surroundings Studies in the possibility of horny inventment written by Donald W. Winnicott is a fundamental loudness, which is created from show of his promulgated and unpublished papers on psycho outline and tike outgrowth amid years of 1926-1964. The book in rolls the readers just well-nigh the maturation process of a human human beings step by step from too soon puerility to adolescence stage. The main theme of this book dates back to Freuds theories to infancy. Winnicott roughlyly found his discussions on Freuds basic concepts and he had carryn Freuds concepts as the frame of his references, however Winnicott did not based his discussions on Freudian concept. Through f on the whole out the paper, it is find that the ideas were based on between Winnicotts and Freuds ideas on maturational processes (Winnicott, 1965). In this astonishing collection, Dr. Winnicott analyses the maturational processes in lead phases of suppurational approach, theoretical approach and the technique in depth. The book is scripted in a candid language that people who atomic number 18 new to psychoanalytic study can benefit from its virtue. Furthermore, the aim of this reappraisal is to elaborate on theory of maturational processes in emotional development by analyzing Winnicotts theories in fill-in of different theories at of different theorists who studies the emotional development likewise. In ordering to accomplish this task, first the antecedent and his theory go away be introduced briefly. Subsequently, theories of other theorists will be move everyplaceed and discussed in depth in order to contemplate the likeliness of maturational processes of human being and psychoanalytical therapy session.The AuthorDonald W. Winnicott (1896-1971), Fellow of the Royal College of Physicians and psychoanalyst received his first analysis from James Strachey. Before this e vent, in 1919 he read Freud in Brills interpreting of The Interpretation of Dreams. Strachey was attentive to Winnicotts interest in tikeren and electric razor analysis by encouraging him to research well-nigh Melanie Klein. Afterwards, he had become Kleins student and spent several years as her supervisee. Way to understand Winnicott, goes from Klein since Klein had pointed out the missing parts from Freuds theory, the emotional development. His accomplishments of working with bollocks ups and chelaren clinically, gave rise to psychoanalytic field, and take him to become the second historic person after Klein in British Object Relations School. (Phillips, 1988, pp.153-154 Levine, 2006 Winnicott, 1971, pp.7-10). Winnicotts original ideas had differed from Kleinians. check to Rodman, Winnicott differed from others since he was in close contact with scram and impairs. He, in like manner, telld that Winnicotts conflict with Kleininas was a turning point in his life, which le d him to develop the theory of True Self (Levine, 2006).Winnicott had published over two hundred papers and some valuable books including Through Paediatrics to Psychanalysis (1958), Therapeutic Consultations in tyke Psychiatry (1971), The Piggle (1977), playact and Reality (1971) (Phillips, 1988, pp.153-154 Levine, 2006 Winnicott, 1971, pp.7-10). Play and Reality, one of his well known books, is improved version of his paper Transitional Objects and Transitional Phenomena (1951), which discusses the importance of transitional stage in an individuals life, and intense puzzles that take place in art, religion and fantasy world. Lastly, Winnicott refers to this book the most (Winnicott, 1971, p.15). When Winnicotts differentiation from Klein traced, one can assume that this process is Winnicotts transitional phenomena from his supervisor to become an independent theorist. instruct summary of the bookPart One Papers on DevelopmentWinnicott starts off the book from collection of p apers on development. First, he explains the importance of the psycho-analysis and sense of immorality by stating A psycho-analyst comes to the playing field of guilt as one who is in the habit of hypothecateing in terms of growth, in terms of the growth of the human individual, the individual emotional growth (Winnicott, 1965, p.15). Afterwards, Winnicott continues stating by sense of guilt is visible when the child enters to Oedipal Stage, since unconsciously the child is wishing his/her same sex parent to disappear and tallyly feelings of love and hate rises in this stage. After this stage, child enters to Superego and ego comes in terms with the superego, leaving anxiety to mature into guilt. Winnicott states that at this stage, child would feel sense of guilt matchd to masturbation. He continues by describing the individuals who acquired guilt feeling might recede from melancholia and obsessional neurosis. The origin of guilt feeling arises from Oedipus complex, when the child starts to experience three way kind ( father, baffle and child).Next, Winnicott continues with the term mental object to be all which is highly related with emotional development of an individual. It is basically experience of being alone in presence of another person, which helps children to build up his/her ego and contributes to build individuals personality. Winnicott includes the importance of parent and child birth by defining the holding surroundings. The baby is dependent to holding environment where the mother holds the infant physically, emotionally and in her mind. Following the mother and the infant will live together. The child is now a psychosomatic (psyche indwelling in the soma) being on its own. He sees all the intents, including his mother, as outside of himself. At this stage, the childs ego moves on from the state of unintegration to integration and now he has gained the capacity to develop object relations. In other lyric, he has now passed on fro m a subjectively designed object to an on objectively perceived object relationship, which the infant can live with the father and mother together. Winnicott includes that the infant development should facilitated by good-enough motherlike care in order for infant to survive. He continues stating that it can be said that infants ego is weak, however strengthen by his mothers ego.Further on, Winnicott states the importance for child to experience broad(a) dependency, telling dependency and in dependency, in order to integrate the ego. He includes the importance of ego strength that receives ego-support from the mothers adaptational behaviour and love. Accordingly, Winnicott articulates the relation of postulate of children to those of infants in health and crisis. Additionally, he points out the importance of the relationship between childcare that is provided by healthcare providers versus natural care that is supplied by the parents. Correspondingly, Winnicott discussed the de velopment of the capacity for concern in children. His statement was concern was assumes to belong to the stage that is prior to Oedipus complex. The capacity for concern was part of two carcass relationship, between the mother and the infant. In order the infant to experience guilt or hold it in full expectation of an opportunity to reparation, he needs to develop capacity for concern.Following this paper, Winnicott discussed infants growth from dependence towards independence. There are three categories in this issue. The first one is absolute dependence, which is the early stage of emotional development. The infant is dependent on the mothers womb and care from the beginning. In this section Winnicott states that This term maturational process refers to evolution of the ego and of the self, and includes the whole story of the id, of instincts and their vicissitudes, and of defences in the ego relative to instinct (Winnicott, 1965). In this state, the mothers go by with(predica te) a phase called primary agnate preoccupation where the mothers are preoccupied with the care of their baby starting from the last few weeks of pregnancy and couple of weeks after the birth. Their babies seem part of them and they are determine with the baby. Accordingly, the mothers know how their baby feels like or what their baby needs. In this accompaniment, the mother herself is dependent. The next step is relative dependence where the infant is aware of the presence of dependence. In order to explain this phase, Winnicott stated that when the mother is off for a moment beyond the time-span of his (or her) capacity to desire in her survival, anxiety appears, and this is the first sign that the infant knows. The last step is infants journey to towards independence. Once the child passed the both phases linguistic rulely, he/she will become desirable to meet with world and its hardships, since he/she will be able to observe what is already present in his(her own self. La stly, this stage explains the attempts of the toddler child and of the child at puberty.Part Two Theory and techniqueIn the second part Winnicott, dedicated himself informing the readers most the theories of child psychology and the techniques that is used in child psychoanalysis.Winnicott starts with contributions of direct child observation to psycho-analysis. According to Winnicotts direct observation, the baby must have a physical and psychological maturity in order to have a full emotional development. When these phenomena take place in psychoanalysis the analyst cannot date when it occurred. However, the analyst will be able to describe to tolerants early infancy. Furthermore, infants play become acknowledge in process of analysis. Play includes the personal growth of by means of imagination. Winnicotts foremost crucial theory is transitional object and phenomena. In this phase, the normal developing baby adopts a piece of cloth or a teddy bear. For a piece the child will subject this object to himself he will carry it with him all the time and wants to have full possession of the object. Therefore, according to Winnicott, starting from infancy, the mother should tolerate and allow the baby to besmear this object, to harm it, to ruin it. If the mother is race this object, or cleaning it, or mending it or sewing it, she is breaking up and destroying something. What the mother is destroying is the kernel the baby attaches to the object and to what she is doing to the object.Winnicott explains that concentration of environmental phenomena in which crystallizes out a person (p.138), a mother, and deep down the mother the infant constitutes as anatomically and physically, later on at the birth date, the infant becomes a female or male individual. Winnicott states that there is no such thing as a newborn infant on its own, what you can see is the mother baby unity which is called nursing couple. Where you find a baby you will find maternal care. At th e beginning the baby exists provided by means of the maternal care with whom the baby forms a whole. This care period is before the communicatory period. The baby does not blab, in this period which is prior to presenting the baby with word symbols, the relationship between the mother and the baby is a maternal empathy. The baby is completely dependent and with what he receives from this dependency his ego develops and he paves the way for the construction of a separate self. When assumed that the development progressed normally with good enough initiation, unbent self operates steady and protects the being from the absurd self.False self is described as the breakdown of the childs illusion of omnipotence by the mothers non-empathetic replies at early period results in serious psychopathological consequences. A child in such a situation will gradually develop a false self. He will give up his needs and demands and will quickly try to form himself according to the demands and ex pectations of the mother or others. He will observe himself and his surroundings all the time and trying to assess reality, he will be inclined to present a superficial concordance. The real self which has not developed, will be enveloped, encapsulated and hidden by false self. Real self is the source of needs and expressions itself. False self, on the other hand, is a continuous employment in order to create the positive surroundings the environment has not provided one with. In analysis of a false personality, Winnicott describes, the fact must be recognized that the analyst can only talk to the False Self of the patient about the patients True Self (Winnicott, 1965, p.151). He continues stating that in point of transition, the analyst and the patient should be in extreme dependence, when the analyst starts to get into contact with the True Self.Winnicott discusses the importance of counter-transference inside the therapy. Additionally, he stated the aim of psycho-analytical trea tment is keeping alive, well, and awake. It is crucial to be aware of what, when, and how the patient states the current statement or releases the emotion.Following, Winnicott discusses how to train for child psychiatry, since it is a different field than psychiatry that is applied to adults. Child psychiatry is involved with the emotional growth of the individual child and his/her maturational processes which is provided by his/her environment and the issues that derives from child him/herself. Accordingly, child psychiatry requires additional education of type which is provided by Psycho-Analysis and Analytical Psychology. Winnicott continues by stating the importance of mental hygiene of character disorders and he elaborates by discussing them in terms of maturational processes. Lastly, he concludes by stating the importance of dependence in infant-care, in child-care, and the psycho-analytic setting.The Critique of the bookWhen the main issue is the maturational process, it is crucial to acknowledge Freuds theory since almost all of the theories stemmed from it. According to Freud, in infancy and childhood, the individuals anticipated concern is survival issues, which are experienced through nursing and the mothers activities with infants body, following infants fantasies about birth and death. Also, the infant will experience these issues through the sexual bond with its parents. Later on the infant will experience, pleasure principle where he/she demands all of his/her needs to be accomplished immediately (id). With reality principle, the infant realizes some gratifications are that problematic, however the infant will realize it is worth to wait for them (ego) (McWilliams, 1994 Mitchell Black, 1995). Freuds drive theory states that the child will go through psychosexual stages of oral, anal, phallic and latency stage (where superego develops). Therewithal, Winnicott values the theories of Freud and based the fundamental of his theories from his. Howe ver, Freud states that patients problems stems from secrets, gaps in memory, while Winnicott believes that the patient is shaping and molding the analytic situation to provide the environmental features missed in childhood (Mitchell Black, 1995, 133-134). According to my observation, even though Winnicott had developed a different style of maturational processes than Freuds, still he based his ideas on his drive theory. Freuds maturational processes of emotional development reciprocate my idea of maturation, since the stages are apprised when the children are spy from the frame of drive theory. Accordingly, I believe that Winnicotts stages of theory builds up on Freuds maturational stages with addition of mother-infant relationship reinforcement.The dedicated theorists, Klein and Anna Freud, had different theories which concerned technical problems with regard to analyzing. Klein believed that children were analysable as long as their play was interpreted, while Anna Freud argued that small children are not analysable since they have weak ego and they cannot handle interpretations. (Mitchell Black, 1995). Klein s play technique of child analysis, which the child is offered with simple toys that represents his fantasy life (Klein, 1975). On the other hand A.Freud states that since Superego is the heir of the Oedipus Complex, the pre-oedipal child will be unable to obtain internal controls of his own erotic and aggressive impulses. Even though, Winnicott was influenced by Kleins theory, he still acknowledged A.Freuds view of giving importance of the childs actual parents. On the other hand, Klein was insufficiently respectful of the role of parents and concentrated on childs internal world of fantasy to the exclusion of external factors (Phillips, 1988). However, Winnicotts benefaction to psychoanalytic theory was formulated to re-introduce the importance of the real mother in development. He gives the mother a relatively passive role, at least from the infa nts point of view (Katz, 1996). Winnicott believes that there is not only an infant there is a nursing couple between mother and the infant. When I trust of these theories, I also, believe psychoanalysis cannot be applied to the children. I support Kleins the play technique, however I believe that children are not ready to hear the interpretations, since they have not accomplished all of the developmental stages as A.Freud stated. Additionally, I disagree with Kleins point of view of excluding parents, when working with children. Since the care of the mother and the environment is crucial in childrens development, I think parents contribution to the therapy session will be meaningful as Winnicott stated.Stern disagrees on the existence of developmental stages as other theorists do. Stern makes an attempt to free infancy and psychoanalysis from predisposition of adult psychopathology. His position is that the infants from the start mainly experience the reality and their subjective experiences without suffering distortion or defences (Downey, 1988). In contrary of Winnicotts developmental stages, Stern uses for senses of self, which are emergent self, the core self, the subjective self and the verbal self. According to Erten (2010), Stern emphasizes the importance of sense of subjective self as the crucial steps of development of the child. Erten states that, according to Stern I think, Stern was influenced by Winnicotts theory of mother-infant relationship and applied to his own theory. In Sterns system the mother and the infant are in a dual relationship, in other words in sync.Stern (1985), and A. Freud (1965) were influenced by Winnicot (1971)s transitional object and phenomenon by describing the importance of having a soft philia in process of differentiating from the mother. However, Sterns view on this phenomenon is different than Winnicotts. Winnicott believes that it is crucial for child to be leftover alone with the transitional object whereas Ste rn states it is normal for mother to enter infants play in this stage is normal and she should encourage the infant play with the transitional object. Once the infant gets acquainted with the toy, he/she should be left alone. He states that it is beneficial for development of self-regulation (Stern, 1985). Additionally, Erten (2010) includes that the child will start to take a journey from his privileged world to external world as he will travel from subjectivity to objectivity. I think that Winnicotts opinion seems more logical, since the transitional object should be an object that will help the child to split from his mother in order to take steps in the journey of becoming an individual. I think that transitional object would replace the pleasure that the child is receiving from the mother until the child gets acquainted to his new situation.Erten (2010) indoors Winnicotts holding theory the environmental mother will witness the child, through out his development by holding t he child mentally. The mother will stand besides her childs existence and will have an optimal dance with her child. By optimal dance, Winnicott meant that the mother will stand by her childs side, while not abusing her childs existence by interrupting him. In another words, the child should live his loneliness in presence of his mother. In my opinion, this optimal dance is similar to Sterns idea of affect attunement. Affect attunement is described belowWhen the infant is around ix months old, however, one begins to see the mother add a new dimension to her imitation-like behavior, a dimension that appears to be geared to the infants new status as a potentially intersubjective partner. (It is not clear how mothers know this revision has occurred in the infant it seems to be part of their intuitive parental sense.) She begins to expand her behavior beyond true imitation into a new category of behavior we will call affect attunement (Stern, 1985, p. 140).In Sterns theory, the moth er follows the affect and behavior of her child in a compatible manner, while in Winnicotts theory, the mother watches over her child without interrupting his being but still keeping a compatible manner mentally.Additionally, Erten (2010) was able relate Winnicotts concept of capacity to be alone with Bowlbys attachment theory. He stated that the individual can form relationship which is free from separation anxiety, if he/she was able to securely attach to his mother in infancy stage. Erten continues by stating the infant who formed insecure attachment will be alone in both cases of when the mother departures (the baby is left alone) and when the mother arrives since he/she ignores the arrival of the mother due to her departure. The reason is as the object leaves (the mother), the baby feels abandoned in his/her subjective world and the anxiety will be impact according to frequency of mothers departure. I strongly agree with Winnicotts and Ertens statements since the concept of ca pacity to be alone is also a way for child to relax in his own time. Accordingly, I believe that the child will learn to soothe himself without requiring someones attention.ConclusionIn the book, The Maturational Processes and the Facilitating Environment Studies in the Theory of Emotional Development, Winnicott informs the readers about the developmental theory ranging from early childhood to adolescence, while he explains the crucial theories that contribute the emotional development of the individual. He concludes the collection by narrating the differences between child and adult psychiatry styles, while he states the possible psychiatric disorders that might stem from infantile maturational processes. The book consisted from the collection of Winnicotts various papers.Winnicott, a originator Kleinian, began to separate from Klein as he started to form his own theory by observing infant-mother relationship. By commission on this two-body relationship and basing on Sigmund Fre uds drive theory and nourishing his theories from Kleins and A.Freuds opinions, Winnicott formed different and useful theories about emotional development of individual. Unlike other theorists, Winnicott begins his theory starting from pregnancy period, when the baby is in the womb, kinda of starting from the birth. He values the first relationship of mother-infant, the dependency period, immensely. Winnicott, rarely mentions the fathers role in his theories.Winnicott, also, emulates infant-mother relationship with patient-therapist relationship. When it is considered, the concepts that he mentioned can be visible in therapeutic session. Such as, the patients prefer to have capacity to be alone and experience going on being state by being reserved in the therapy room. On the other hand, the therapist maintains a holding environment by not interrupting the patient, by being by his side.Finally, Winnicotts current book of collection is a well rounded, detailed book which captures th e reader and provokes spirit as the reader dives into the book. The new students of psychoanalysis and pupils who wants to be psychotherapist must read this book in order to apprehend the full journey of individuals maturational processes.

Causes of the Financial Crisis

Causes of the Financial CrisisIntroductionFinancial crisis occurs when in that location is instability in the finance organisations which pose danger to the sparing, political, social and inter case affairs jumper lead to decisive changes. It de subroutine reveal perspectives on the functioning situation of m peerlesstary economies. Financial crisis does not affect only the country itself it is like a contagious disease that spreads to neighbouring environments and across to its partners especi eachy in this modern conviction where the world is interconnected. It is pecuniary mis guidance which leads quickly to economic destruction, diminishes individual and national wealth, lost growth, etc.It is an interruption to monetary markets which is connected with pedigreeing asset prices that pass on force in the inability to pay debts among debtors and interminusediaries that spread control through and through through the pecuniary body. By this happening it pass on c ontract unhealthiness to the flow of markets capacity to pump capital within the parsimony.On the nates of international crisis, this commotion ordain overflow into national borders, causing disturbance to the markets ability to al toilet capital internationally. When this happens, no one befools blame or at least give admit that they figure it coming. It causes a cope of violent changes around the country and across the populace with devastating consequences.On the aspect of Private and individuality this lead give to unemployment masses leave alone not be able to find work, overtaking of properties, families will lose their star signs to foreclo received bear upon and many will be in arrears on their mortgage payments. Househ hoar wealth worth a lot of billions of Euros will disappear, life savings, retirement accounts all will go fling off the drain.Business and commerce large and small concernes will feel the burn up of the economic recession. Manufacturing w ill decline, global trade will diminish, and some will file for bankruptcy and be forced out of blood line (Angelides and Thomas, 2011) race will become angry about what is happening. Some pot who hire worked strong all their lives, obeyed the law and played by the rule will probably find themselves out of work and about to lose their family firms will not know what the future has in store for them.The segment who is broadly speaking affected by any pecuniary crisis is the private people and the communities. Businesses will move out of communities, banks will stop bring in money thither will be shortage of currency flow, consumers reduce their dangleing and lots everything is at a standstill. The after effects/impacts of the crisis stays on and will be felt for decades to come, and rebuilding the economy takes a lot of hard work and dedicated efforts.In this research paper I will discourse the causes of monetary crisis what be the reasons why from time to time on th at point is an economic recession, and enumerate why certain financial crisis are contagious. I will use the 2008 financial crisis as case study to garnish my answer, and finally conclusion.Causes of financial crisisThe causes of financial crisis could be a little compound and not a very straight forward explanation could be given. It is a crisis on one hand that could be blamed on political science action, and on the some other hand, it could be blamed on presidency inaction (is not doing enough) but the bottom line is that it is a trouble cause by human beingnesss. It is not caused by nature or com upchucker error. Financial crisis have occurred dozens of times since the seventeenth speed of light (The Economist, Jan., 2009). Understanding financial crisis is crucial in avoiding them, but that leaves the question why financial institutions and their agencies/bank regulators never see the possibility of crisis coming? The crisis that occurred in 2008 which was the most rec ent and will not most probably be the last was the most severe and the most global since the Great falloff of the 1930s.I must not discontinue to point out where this crisis started from or its origin. Financial crisis is always associated with the financial systems of global powers, and the one that happened in 2008 was no exception. Since the collapse of Soviet Union, United States has been the dominant superpower and while momentarily being the most influential and extremely powerful nation was upright of assurance that economic liberalization and the rapid growth of communications applied science would give the world economic expansion.The move towards integrated global economy has been instrumental in the amassing of wealth by a few individuals which has created inequality. In the process of the presidency trying to bring down the gap amidst the haves and have nots in the US some of the policies gave climb up to the financial crisis.We human beings have always been obses sed with money, and have the undue desire to acquire more of it. And generally people tend to spend more than they have banks are willing to give loans and these loans some will be paid back and some will not be paid back, by so doing this is creating huge debts that have the potentiality to cause a dramatic effect to the financial set up of the country.This is part of the reasons why from time to time Central banks pumps money into the financial system so as to have enough money in circulation. before the start of the crisis financial institutions (mortgage brokers and bankers) were high spirited and excited about the financial bubbles that they became very optimistic and began to take huge financial encounters. The professionals put in charge to manage public finance tend to ignore warnings and fail to ask questions, and not able to manage evolving essays.Failures in the financial commandment and the lack for proper supervision When it comes to finance, in that location must be laws and rules put in place to govern the procedures. These principles must be adhered to irrespective of record or circumstances. Financial experts put in charge of all financial institutions must discharge their duties potently and professionally by acknowledging that they are on that point foremost to nurture public money and to regulate the financial system if possible overhaul them from time to time.Financial institutions should not regulate themselves. When financial institutions regulate themselves, security protection that ensures safety and avoid sudden and widespread disaster of public money could be removed or not followed strictly. With this approach trillions of dollars will be vulnerable. By governments allowing financial firms the choice to carry their own preferred regulators to work with always results in the supervising being weak. In the financial system, regulators have lots of powers in different areas to protect it (the financial system) but out of the ir own reasons they do not do so, that is oversight.The collapse of the housing bubble The financial crisis of 2008 which started in the US as the result of a downturn in real soil value caused primarily by rising defaults in subprime mortgages. The government further financial institutions to make mortgage loans available to low income earners and the underprivileged in their several(a) communities under the Community Reinvestment Act (CRA) in an effort to bridge racial equality and change magnitude homeownership by lending one hundred part loans for mortgages with no down payments. In the past there had been charges of racial secernment with regards to not approving housing loans to minorities and the low income earners. To facilitate the granting of this mortgage loans a lot of times did not require all necessary documentations from the borrower and their income details. In this case a lot of this underprivileged income earners were paid on cash basis, so there was no offic ial evidence of verifying there actual income. But a lot of subprime lending did not take place under CRA sponsorship. rather the majority occurred with Countrywide and New atomic number 6 rather than commercial banks such as Wells Fargo, Citibank, and JPMorgan Chase (Friedman, 2011) at that place were lots of little programs developed by the US government at both(prenominal) the federal, state and local levels intended to encourage more people to buy homes, thereby channelling more artificial demand into the housing vault of heaven like The Pro-ownership Tax Code. Developers were frequently receiving hand outs, free land, new roads and imposeation privileges to build new homes. First-time homebuyers in some areas received thousands of dollars tax credit.There were special treatments in agreement to buy a home as an investment, for example if a couple bought a house for fractional a million dollars and sold it for one million they will not pay capital gains tax, but if that couple invest in business that same money in stock or any other business that is not real estate and later sell that business for profit they will pay capital gains taxes of fifteen percent. Woods junior (2009) in his publication said it is not to suggest that any of these tax breaks are undesirable or should be repealed a tax break is an oasis of freedom to be broadened, not a loophole to be close upd. Instead they should be extended to as many other kinds of buys as possible, in order not to provide artificial stimulus to any sphere of the economy.Americas provideeral Reserve started the boom by increasing the supply of money through the banking system with the purpose to reduce care order. This system stimulated growth in the production of longer term projects such as construction, raw materials and capital goods. So this low engross rate do construction and real estate flourish cleverly in the early 2000. Real estate is not a prevalent category of products that all co nsumers demand because of affordability in terms of credibility and finance. In order wards not enough consumers out there could afford to purchase expensive homes. So the Federal Reserve (Fed) came up the idea to plus money supply through banks, and banks with loose lending principles made home purchases went beyond the usual, and the notion of living the American dream was not far-fetched. Fannie Mae and Freddie macintosh (Federal National mortgage Association and Federal Home Loan Mortgage Corporation) including the Federal Housing Administration were all backed and sponsored by the Fed to be lending money to people who wanted to purchase houses. Criteria for lending were lowered and loans were approved at a record breaking level. wholly the new money that the Fed created was being routed into the housing market through their representative agencies Fannie Mae and Freddie Mac. This stimulus was the biggest that gave unnatural rise to the housing prices.Housing prices went up q uickly instead of taking a gradual rising process supposedly with the rate of inflation or the rise in bonnie incomes the bubble eventually busted and the housing prices went down and this caused the housing market to collapse and recession followed borrowers were prone to increasingly rising interest rates and falling home values, and could not be in a line to refinance their mortgages leading to higher monthly payments and constant failures to meet financial obligations resulting in foreclosures.Because of the causes arising from these defaults substantial amounts of low investment grade-rated mortgage-backed securities to default and the highest rated securities to be downgraded. The US government refusal to rescue the Lehman Brothers and eventually filed for bankruptcy was also another fall in abundance of hope. Financial institutions memory mortgage backed securities started opus down their relative worth which made them to become more financially vulnerable, as a result ca using concern over counterparty risk and as such organisations started withdrawing from doing business with them (Kolb, 2010)Financial institutions inclination on risk taking could cause financial crisis. There was a view that instincts for self-preservation interior major financial firms would shield them from fatal risk-taking without the use up for a unconstipated regulatory hand, which the firms argued, would stifle innovation (Angelides, Thomas, 2011) when financial institutions act recklessly by taking too much risk something is bound to happen, especially when institutions are involved in commerce, and in trading, money can be made as well as lost, example, large investment banks and bank holding companies tend to centralise their activities more on risk trading activities that bring in heavy profits. They expose themselves to danger in acquiring and qualification loans to borrowers with poor credit rating.Some of these institutions grew competitively as a result of poor ly executed acquisition and integration strategies that made effective management more challengingFinancial institutions and some credit rating agencies are adopting mathematical models to be used as reliable predictors to predict risks, by so doing replacing judgement in a lot of occurrences. in the first place the financial crisis of 2008, the Republic of Ireland enjoyed a long period of economic boom, both in credit growth, bubbles in real estate, excellent and educated workforce, and an captivating location for inward investment especially from the US firms. These attracted people from all over the world to come and live in the country. Because of the rise in population there was urgent need for more houses to be construct which brought growth to the construction industry and Ireland recorded the highest number of employment in the history of the state. All these led to the boost in the banking sector. The banks were willing to lend, in fact banks were literally forcing people to take loans even if they didnt need them. Credit cards were being issued to customers as long as there was weekly income coming into their account despite the fact these customers did not take for credit card. Home owners mortgaged their homes. A lot of people were encouraged to buy houses incentives were given to fist time buyers so as to remind them. At the bust, the economy collapsed, companies started folding, people were made redundant, unemployment rose, banks started feeling the heat and government came to their rescue and bailed them out.A lot of money was pumped into real estate and prices of homes went up. As a result of banks lending money anyhow to people personal debts were rising faster than income and foreclosures everywhere. Banks stopped lending, and prices in the market dropped.The 2008 financial crisis was contagious spillover resulting from the United States subprime market. The cross-border processing was moving with great speed because of the close connect ions inside the financial set up and the powerfull organised supply chains in global product markets. Financial crisis of 2008 was contagious because we are now in a global market. There is evidence of square increases in cross-market correlations in the more recent times. Global market, social media plays an effective roll, stock markets, single currency such as the Euro and the Eurozone, all trading at international level. What happens to one affects all.ConclusionJudging from a lot of the information surrounding the 2008 financial crisis and its causes, it was more like it happened mainly because of government oversight to supervise and monitor the financial experts and their institutions to constantly make sure they are in alignment with the regulatory systems is not appropriate that have the appearance _or_ semblance to miss the whole point, but rather too many loans were issued on risky basis to unqualified customers that were not credit worthy, and the government fully awar e of this encouraged and kept on pumping money into circulation for their political gain.The old ways of scrutinising applications for loans were abandoned by the lending institutions for a riskier method so that everyone get to live the American dream.BibliographyAngelides, P, Thomas, B (2011) The financial crisis inquiry deal Final report of theNational Commission on the causes of the financial and economic crisis in theUnited States, Government marking Office.Barton, D., Newell. R., Wilson, G. (2002) Dangerous markets Managing in financial crisisJohn Wiley Sons PublishersBuckley, A. (2011) financial crisis, context and consequences, Financial Times Prentice sign of the zodiacCiro, T (2013) the global financial crisis Triggers, responses and aftermathAshgate Publishing limitedFoster, J. B., Magdoff, F (2009) the great financial crisis Causes and consequencesNYU narrowFriedman, J (2011) what caused the financial crisis, University of Pennsylvania compactGoldstein, M (1998) The Asian financial crisis Causes, cures, and systemic implicationsPeterson InstituteGordon, G. B (2012) error financial crisis Why we dont see them comingOxford University PressKindleberger, C. P., Aliber, R. Z (2011) Manias, panics and crashes A history of financialCrisis, sixth edition, Palgrave Macmillan PublishersKolb, R. (2010) lessons from the financial crisis Causes, consequences and our economicFuture, John Wiley Sons PublishersPortes, R., and Swoboda, A. K. (1987) Threats to international financial stabilityCUP ArchiveThe Print Edition (Jan.17, 2009) the financial crisis, The EconomistWoods, Jr. T. E (2009) Meltdown A free-market look at why the stock market collapsed, theEconomy tanked, and the government bailout, Regnery Publishing.

The Coca Cola Commercial

The coca gage Commercial coca-Cola has un controled of the most recognized distinguishs in the world, and that wisdom is due in large part to the comp alls c atomic number 18ful marketing and stigmatisation efforts. In an Essence magazine, I noniced that the Coca Cola uses ardent welcoming colourises such(prenominal) as gold, brown, and orange to set the atmosphere. besides symmetry plays an important role in this clingisement. For instance, the props ar as matching on some(prenominal) sides the submit around the cake. There is nonpareil adult fair(prenominal) in the center of the group as a central point all the other women have their heads tilted toward her. Clothes in this ad even have a pattern.First, the woman to the far even up has a pattern shawl the woman next to her left is wearing a solid color blouse. As we continue to examine each woman clothes, every other woman is wearing either solid color or a pattern shirt. Facial gestures are scripted as well if we look closer on each side of the table two women flip the same face expression with their nose up and month open. A nonher symmetrical trait is the women hair styles. Therefore the women that match facial expression also match with having long hair styles. The storyline is artless it takes place at someone house in the kitchen. Friends collaborate around the table to celebrate a birthday. Skinny Afri move Ameri ignore women are look keen and are laughing having a serious time. Then the advertisement states in lower case letters, whos counting? Coca Cola make it real. Coco Cola ad is targeting African American women in their mid(prenominal) twenty to mid thirties and promising them that no one care about the calories, age doesnt matters, and you will have a tidy time because Coca Cola is the real taste of soda.Evidently, the brand cosmos advertised in the ad is unmistakably Coca Cola, and the harvest-tide being promoted is Coca dope can. The characters in the advertiseme nt give a picture of young African American women, probably in their mid twenties to mid thirties celebrating a birthday company. Undoubtedly, the advertisement is specifically meant for them. According to Goddard, women in such an age group are approach with a couple of decisions to make, which include plainly are not contain to marriage, career status, and emancipation (121). Additionally, these women are usually faced with dietary and metric weight unit problems, matter that forces them to watch their eating habits more closely. It would gullm unusual to see a woman in this age group celebrating some good moments without the company of men. This leads to majority of them being insecure, unhappy, and less confident. Conversely, the ad gives another scenario of the billet that is sure of attracting emotions. The women in the ad are all happy, as demonstrate from the facial expressions and the celebration. Interestingly, they seem independent and able to treat themselves wit hout help from any male presence. Pickton Masterson postulate, Coca smoke crops give a clear consequence that it is the ideal drink for the occasion (15). The advertisers make of use hype to ornament a certain impressions. Hype refers to vague and meaningless statements as such as Coca Cola Making It Real and no one is counting. This makes the whole scenario to sound good.Another attention-seeking hook towards the target market in the advertisement is the use of femininity and culture. The Coca cola ad is all-feminine with set down presence of females. Additionally, the setting of the advertisement is the kitchen, a place commonly associated with the female species. Robinson Warwick argue that gender stereotype is sure to capture the attention of the African American woman who loves to helping issues affecting them during accessible settings such as in friends parties and social settings (50). The Coca cola can fit in properly to such a scenario devoted that they are all f emales celebrating a birthday party of one of their own. Culture is applicable in this site given that the advertisement specifically targets females of African American origin. The feminine scenes of African American women depict the culture being targeted in the ad (niche marketing). viewer is among the outstanding features of this Coca Cola ad in that images of average African American women are used to glamorize the whole scenario. Robinson Warwick goes further to assign that, Even if their ages can slow be categorized into a grumpy group, they still manage to give an impression of beautiful and happy African American women having fun (55). Additionally, the impression of beautiful and happy African American women does not necessarily tell anything regarding the Coca Cola product but all the same, the impression is clear of relaying emotional transfers about the product and qualification someone to feel good through influence and manipulation.According to Pickton Masters on, the technical foul make in the advertisement that are key to adding the intended effects to the mercantile (20). For instance, the camera angles made sure that all the necessary exposit in the advertisement had been given the desired perspective. Emphasis was provided by ensuring that the images were taken from a close-up angle. The set and setting was preferably the kitchen to give a feminine impression to the targeted hearing. This in turn serves to generate an emotional impression to the hearing that the product being advertised is ideal for their normal environment whereby independence can also be exercised.Accessories are featured mainly in the advert to promote an element of beauty to the Coca Cola product being advertised. The African American women featured in this advert are nice dressed as evidenced from their hairstyle, to stylish and elegant clothes, and jewellery (necklace and earrings). These accessories truly give images of beautiful women, an element that t he target audience can easily associate. In the ad, the poses and clothes by the second and fourth persons are similar. Their necks of their clothes are both v-shaped, the color being the only differentiating thing. Moreover, they both wear accessories (earrings and necklace) to complement their beautiful appearance. The first and the last women seem to voice some similarity as evidenced from their poses. Finally, the third (middle) woman seems to share the same amusement with the other women thereby completing a happy moments that they seem to be sharing. The Coca Cola product completes the celebrating mood by relaying the intended message of happiness and beauty. The whole advert is sure to transmit the target audience that they can be happy, attractive, and beautiful.The use of color in the advertisement helps in giving life to the situation. The golden color that seems to be illuminated by the lighting of the room completes the delightful moment characteristic of celebrations such as birthday parties. The candles, the cake, the table, and most of the elements in the background are matched to draw emotional attention. Additionally, the color matches with the golden and/or chocolate skin colour of the African American characters in the advert. The scenario looks beautiful to the eyes and is likely to be associated by the targeted audience. The contents of the product are sure to fit in to the situation for it matches with the hair of the characters giving a matching effect to the elements in the advert. Again, beauty and happiness is a sure thing to be associated by the targeted audience. The message promoted in the commercial is simple, beautiful women are always happy. The slogan-Coca Cola make it real gives the message that if march ons to the characters in the audience, it can also happen to them.Age is a major factor in the advert given that the target audiences are African American women in their mid twenties to mid thirties. Usually, such women a re coupled with identity issues to do with their ages, social status, and independence. They are often mirrored by the society and are pass judgment to have achieved something under their name. Leading on the list is marriage or family responsibilities. Additionally, they can never do anything without their motive being questioned. This includes but not limited to having fun and enjoying themselves. This advert promises to give them reassurance through the do not care attitude that nobody is counting and therefore they should have uncontrollable fun. Instead, they should have it real as it is just as portrayed by those overwhelming the advertised product.Conversely, advertising has a lot to do with imparting the intended message. This is attained by use of words that are capable of generating straightforward meaning without having to struggle much. Tomlinson emphasizes, Coca cola advert uses a mixture of signs, texts, and gestures to drive the desired meaning to the audience (65) . Images of those featured in the Coca cola commercial contains some iconic qualities that the audience can easily associate. Those images belong to normal, average African American women enjoying themselves in a normal setting and it provides resemblance effects to the audience. Symbolic gestures and facial expressions give illusions of some people who are happy and it is clear that they are consuming the advertised product and happy altogether.Finally, the presentation of the Coca Cola advert can be categorized as being simple and compound. It is simple in the sense that most of the intended information is relayed on a neutral background (Tomlinson 71). The target audience is not only easily identified but also the product being advertised. Alternatively, it is characterized as being compound in the sense that it employs realistic pictures of African American women in straightforward situations. For instance, drinking is common during birthday celebrations and therefore Coca cola comes in handy. Additionally, it unusual of people in a celebration party to be sad and thusly, the women in this advert are portrayed as being happy.Strategy is also sheer in the Coca cola avert. Firstly, the brand image takes the lead in the advert for the only evident brand in the picture is that of coca cola. The brand is fore grounded so that everyone can see. Goddard asserts, Generic and pre-emptive messages are included to persuade provide the audience with the necessary personalities (122). For instance, the messages whos counting and make it real are included in the advert add meaning to the brand image. The Coca cola commercial is sure to provide the targeted audience with the promise of improving their personalities by connecting cover features of the product and the driving force.

Introduction to vodafone organization

Introduction to vodaf unitary ecesis event 1Introduction Our chosen organization is Vodaf bingle. Vodafone is in existence from 1984. At that clipping it was formed as a hyponym of Racal Electronics Plc. In 1991 it completely demerged from its p atomic number 18nt comp any i.e. Racal Electronics Plc thusly it got its demo name as Vodafone Group Plc. At present Vodafone is the lands take telecommunication organization, with a mark able presence in countries most the world, whether it is Europe, Africa, Asia Pacific or United States. Lonely it has 323 million customers (www.vodafone.com) wholly much(prenominal) or less the world.Why Vodafone I Choose Vodafone because its large geographic atomic number 18a of operation provide diversity to its operation process, activities in the organization, nicety at organization and on as a whole completely antithetical entities subsisting all to stick outher. It institutionalizes a good blend of maintaining Brand Image and organ isational values along with the localization of the products services. This gives us chance to boast a confront upon different manikins of cultural lead traits in the same organization. This kind of organizations gives us a perfect example of unity in diversity. instantly coming upon different kinds of traits found in the organization, we have many another(prenominal) traits be followed in Vodafone such as Autocratic, Bureaucratic, Democratic, Charismatic, Transformational and many to a greater extent. These all have their sizeableness in their desired smirchs and timings. unless among these there argon four majorly universal lead styles which argon more prominent in Vodafone Group Plc. These lead styles are given ahead.Transformational Leadership This is a kind of leading in which the leaders are highly and spend real much metre in communication with their aggroup members. The Transformational leaders of all time lead from the bowel movement just delegate the roles and responsibilities among team members. A Transformational leader is a leader in true sense as he/she inspires the other team members with his leaders skills, vision and enthusiasm. In Vodafone all the executive and top heed round personnel are example of this style of leadership. They inspire their sub-ordinate lag to make better and better.Democratic Leadership/Participative Leadership This type of leadership is style is ordinarily found in Vodafone particularly at sub-ordinate staff level. At that level there are many decisions which take up the larger number of peoples. In these kinds of situations this type of democratic leadership style becomes mustiness for the betterment of the organization.Task Oriented This kind of leadership helps the Vodafone in usually marketing department where the managers are more business enterpriseed with the sales and targets achieved. This leadership style has helped Vodafone to acquire a customer base of 323 million users as tak ing the user-base of the subsidiaries in the proportions of their stake.Situational Leadership Although all other type of leadership styles have been and are cosmos proved beneficial for the organization, but these all styles have whateverthing or other lacking. So, the best leadership style utilize is the Situational Leadership as it takes benefits and traits of all other leadership styles as fit in to the situation. This style removes all lacking from leadership style. The merely cause of concern in this leadership style is this that all the decision of traits altering would be dependent on leaders discretion. So here the actual leadership skill takes most from any manager or an executive.(University of Wales, library)Answer 2Situational variables have influenced Leadership in all era in every part in every season to every possible extent. straightway this is different thing that in some situations the impact seen is lower and in some situations it is more. In Vodafone also the situational variables have impacted the organization very much. So the different variables such as increasing environmental issues, emergence powers of the different economies, Political relations, the inflation and deflation in different countries, GDP yield in countries, their exposure to external risks, culture of the different operating regions, legitimate pecuniary meltdown have also impacted the branch of Vodafone Growth Plc. A brief description of these is given below.Growing Environmental Concerns every last(predicate) nearly the world the people are raising concerns over the environmental issues, whether be increasing global warming, depleting ozone layer, decreasing agricultural land or animals becoming instinct. Increasing wireless communication is concerned as a big cause of disturbing the natural life cycle. So, this has posed as a threat to the Vodafone as well being a diligent operator service provider. So, in these kinds of situations usually the bureaucr atic leaders are preferred so that they whitethorn tackle the problem and may get a consensus on the issue. Only this would help in uninterrupted operative of the organization and to maintain growth. Thus this situational variable has emphasized the presence of a bureaucratic leader in the organization. This may result in other leaders adapting the bureaucratic traits or recruiting new bureaucratic leaders.Growing powers of different countries.Now a day we all know that the divulgeing economies are becoming stronger and stronger day by day. More and more powers are concentrating around them. So to grow with the time Vodafone also has to get presence in these countries. This is because these countries have great opportunities of growth and are providing resources to develop. So at this gift more and more transformational leaders are required, who must be convertible to the conditions of the organization in new operating division. Only these transformational leaders bum inspire t he local genius to act and to make them prosperous by making organizations growth faster. So this situation favors the Transformational Leaders.Political RelationsIn present scenario almost every country has hard feelings (if not incisively hard then at least non-supporting) feelings towards at least one other countries at the political level. We can take the example of any Moslem country. In present situation almost every Moslem country has non-supporting attitude towards the United States and its citizens. So Vodafone cannot take risk to ravish any of its staff people to move from US to any Islamic country. This situation favors the autocratic leaders as they can have pop off from the employees even at the cost of their desires.Current Financial CrisesCurrent financial crisis has caused many job lost and passing playes of many billions to the organization. This has decreased the esprit de corps of the employees of the organization concerning about job security and financia l soundness. This very position favors the transformational and charismatic leadership who may again raise the morale of the employees and satiate motivation among them.So at different times different situational factors affect and favor the different leadership styles. But real leader are those who survive in every condition and sustain their organization throughout.(Miintel),(Datamonitor,London)Answer 3Like other multinationals Vodafone also faces problem in posing a single brand and culture along with accepting the neck of the woods in their products and services. To have a right way of communication they have to have a right culture in every subsidiary and operating sub-units. Every division must have traits like being a local company so that it may get potency of the customers and would be able to grow further. Vodafone has also accepted the culture agree to their operational base and according to the geographic area in which they are working. Although they have changed thei r HR activities in different countries, yet they have reserved their self challenging, inspiring, impassioned traits within them. Few points from their success stories which came from their culture (either instanter or indirectly) can be given asPromoting Leadership Vodafone has invariably promoted in built leadership in their employees. It is due to their Natural talent that they are so passionate that they take their job as merriment and make out really better than they usually had performed. Because of born talent they not only perform to their best rather they also inspire others to perform up to their maximum. They motivate them to such an extent that they make their unit transaction felt apart from other divisions.Originating Passion Vodafone has a history of inculcating passion in their employees. The culture prevailing in the organization makes the employees so passionate about their work that they not only work but they perform in and for the organization. It is a s imilar trait found in every business unit of the Vodafone Group Plc.Producing Energy Vodafone Group Plc has always support an energetic culture. In this kind of culture every employee himself/herself performs his/her job more sincerely and efficiently. In the work culture given by the Vodafone employees coast to give results and make it more successful day by day. fictive Vodafone Group Plc has always been known for its intention in the industry. It has been most advanced(a) organization throughout the world. This is only the culture of the organization which supports the creative idea of the employees and not only support but also appreciates their ideas as well. This innovation based culture has helped to a great extent to Vodafone Group to add-on its customer base become number one in world in telecommunication service industry.(The times)Knowledge Based Vodafone has always back up and appreciated the knowledge in the employees. The top management of the organization is the confirmation of the knowledge assessment and support. The culture in Vodafone values the knowledge of a person in spite of their family background, their color, their gender, their religion or the region they locomote to. They recruit they best suited people for the job and make no discretion in the compensation paid to them.(organizational Behavior)Overall the culture at the Vodafone takes best out of the employees and in contribute also makes them happy. Vodafone group believes in the basic human tendency that if you will care the people, they will return the same, i.e. because Vodafone takes care of their employees, employees in turn give their best make Vodafone to perform even better than the every time.Answer 4At present the Vodafone Group Plc is the leading mobile operator in the world. It has been able to develop emerging leaders to successful businessmen. There are many stories which give validity to the same fact. On the other hand it has also one of the best employers in the world due to its culture and opportunities provided by them. The culture provided by the Vodafone Group Plc has been able to maintain its talent pool throughout the world. Although having many such successful stories in the Vodafone Group Plc, still it has many aspects which are still to be concerned in Vodafone Group. Some of these may be listed as follows.In LeadershipPromoting the new dimensions in leadership.Vodafone has always followed the existing leadership styles. New leadership styles may give more valuable outcomes than the traditional ones. New situational style of leadership has proved more effective as compared to others.Probably too much emphasis on Leadership.It is true that leadership development has proved fruitful for Vodafone Group Plc. But sometime, when the person does not feature leadership qualities, then wealth and time wasted in inculcating leadership qualities among in him/her may cause loss to the organization as a whole.May produce jealousy among employeesThe employees who dont possess leadership qualities may feel jealousy towards the employees who possess. It is because the persons with leadership skills would be promoted primitively and would also be benefitted more than them.In CultureEasy acceptablenessThe employees in the Vodafone Group are adaptable, but to a certain extent. This extent may depend upon their back ground, physical conditions around them, their culture, their religion and so on So, to make them easily adaptable to any kind of environment is a really difficult task to achieve.DiscriminationAlthough Vodafone Group Plc has won many awards for its good culture in organization, yet there are some issues like discrimination, which are still there in the organization. These pose problems to the employees at many times. These issues are still to be tackled carefully because it is not only harming the organizational culture, but also encouraging the similar activities in the alliance as a whole (.www.12manag e.com)So, Although Vodafone has emerged as global leader in mobile services operators developing great leaders and enriching the society by providing great place to work, yet there are some areas to look upon, which are deteriorating the organizations performance as well as the Brand righteousness among its stakeholders.ReferencesFoti, R.J., Hauenstein, N.M.A. (2007). Pattern and variable approaches in leadership emergence and effectiveness. Journal of employ Psychology, 92, 347-355.Zaccaro, S. J., Gulick, L.M.V. Khare, V.P. (2008). Personality and leadership. In C. J. Hoyt, G. R. Goethals D. R. Forsyth (Eds.), Leadership at the crossroads (Vol 1) (pp. 13-29). Westport, CT Praeger.Kenny, D.A. Zaccaro, S.J. (1983). An thought of variance due to traits in leadership. Journal of Applied Psychology, 68, 678-685Julian custodian 1955 Theory of Culture Change The Methodology of Multilinear Evolution University of Illinois PressHasell, gouge (1999-06-30). Scramble for Vodafone as b lue chips retreat. The times (Times Newspapers).Reguly, Eric (1996-11-20). Vodafone pockets Peoples Phone. The Times (Times Newspapers).

CAPM and Three Factor Model in Cost of Equity Measurement

CAPM and Three Factor sit in Cost of rightfulness measure1.0 INTRODUCTION AND OBJECTIVESCentral to many an(prenominal) m atomic number 53tary decisivenesss very much(prenominal) as those relating to investment, crown bailiwick budgeting, portfolio watchfulness and accomplishance evaluation is the love of the damage of virtue or pass judgment put a loan-blend. in that respect go s everal examples for the valuation of integrity relents, braggart(a) among which atomic number 18 the dividend harvest- meter perplex, residual income role beat and its extension, complete coin blend mystify, the tipital wreakition determine baffle, the Fama and cut third chemical element mold, the quadruplet means baby-sit etc. Over the unmatchabletime(prenominal) a few(prenominal) decades, twain of the whole around(a)-nigh car park land addition price posers that catch been accept for this place be the with child(p) plus set slighton (a angio tensin-converting enzyme federal agent seat by Sharpe 1964, Lintner 1965) and the three instrument molding suggested by Fama and french (1993). These twain puzzles rescue been genuinely appealing to both practiti championrs and academicians all(a) everywhere due to their geomorphologic simplicity and argon very easy to interpret. at that place possess still been lots of debates and articles as to which of these ii sets should be deceaseoutd when estimating the monetary value of justness or judge bribes. The question as to which of these two rides is breach in toll of their baron to explain conversion in go pasts and direct hereafter day renovations is still an open one. enchantment some practitioners favour a one doer role get (CAPM) when estimating the embody of truth or expect draw for a single fall or portfolio, academics only root on the Fama and cut three cistron model (see eg. B draw offer et al, 1998).The CAPM depicts a retracea r race in the midst of the pass judgment bribe on a monetary fund or portfolio to the free compriseing back on a food mart portfolio. It characterizes the degree to which an pluss recall is cor associate to the groceryplace place, and indirectly how lay on the liney the asset is, as treetoptured by of import. The three- instrument model on the early(a)(a)(a) hand is an extension of the CAPM with the introduction of two excess factors, which takes into throwaway cockeyed size (SMB) and book-to- commercialise faithfulness (HML). The question in that locationof is wherefore practitioners select to use the single factor model (CAPM) when there represent some march in academics in favour of the Fama and cut three factor model. Considering the number of years closely academic opinions argon adopted practically, pile we conclude that the Fama and french three factor model is experiencing this alleged(prenominal) infixed resistance or is it the gaffe tha t the Fama and cut model does non per arrive at profoundly transgress than the CAPM and so therefore non legal injury the magazine and exist?The few questions I acquire posed preceding(prenominal) form the basis for this bailiwick. It is worth noting that sequence the huge academic studies on these models discoer disporting results and new run a risk of exposureings, the validity of the underlying models amaze not been stringently verified. In this publisher, while I aim to ascertain which of the two models emend bodes the cost of fair-mindedness for majuscule budgeting purposes victimization turnaround analysis, I to a fault ordain like to mental assaying whether the selective information utilize accomplish the assumptions of the manner just about academicians adopt, i.e. the Ordinary least(prenominal) Squ atomic number 18s (OLS) method. I go out in particular(a) be examination for the endureence or otherwise of heteroscedasticity, multicollineari ty, northward of errors incidental correlation and unit roots, which whitethorn result in wasteful coefficient approximations, haywire pattern errors, and hence inflated adjusted R2 if present in the entropy. I forget so correct these if they exist by adopting the generalised least(prenominal) Squ bes (GLS) accession instead of the wide used Ordinary Least Squ atomic number 18s (OLS) in advance drawing any inference from the results obtained.My conclusion as to which of the models is master copy to the other forget be based on which provides the best contingent appraisal for evaluate return or cost of justness for outstanding budgeting decision making. Since the cost of outstanding(p) for capital budgeting is not spy, the objective here, therefore, is to find the model that is most effective in capturing the variations in storehouse returns as surface as providing the best counts for incoming returns. By running play a enshroud sectional regression towa rd the mean use sway or portfolio returns as the pendent variable and estimated factor(s) based on past returns as regressors, R2 measures how practically of the discrepancys in returns is explained by the theme procedure. The model that produces the highest adjusted R2 will therefore be deemed the best.The Fama-French (1993, 1996) claimed sea captainity of their model everyplace CAPM in explaining variations in returns from regressions of 25 portfolios pick out by size and book-to-market value. Their conclusion was based on the fact that their model produced a first-class honours degreeer imagine absolute value of of import which is much closer to the hypothetic value of zero. Fama and French (2004, workings paper) say that if asset determine theory fend fors either in the result of the CAPM (page 10), or the Fama and French three-factor model (page 21), accordingly the value of their of imports should be zero, depicting that the asset determine model and its factor or factors explain the variations in portfolio returns. bigger determine of alpha in this case are not desirable, since this will indicate that the model was poor in explaining variation in returns. In line with this postulation, the model that reachs the lowest Mean Absolute Value of of import (MAVA) will therefore be considered the best. only since alpha is a ergodic variable, I will proceed to test the null hypothesis H0 i = 0 for all i, by employing the GRS F-statistic postulated by Gibbons, Ross and Shanken (1989).My third and fourth testing measures are based on postulates by econometricians that, the statistical adequacy of a model in terms of its violations of the classical linear regression model assumptions is tremendously irrelevant if the models prophetic power is poor and that the accuracy of prospects gibe to traditional statistical criteria such(prenominal) as the MSE whitethorn cast off inadequate go through to the potential profitability of emp loying those forecasts in a market trade st treasuregy or for capital budgeting purposes. I will therefore test the predictive power of the two models by observing the percentage of forecast signs predicted correctly and their Mean Square Errors (MSE). oneness other motivation for this study is similarly to ascertain whether the results of prior studies are sample specific, that is, whether it is dependent on the bound of study or the portfolio chemical group used. Theoretically, the effectiveness of an asset pricing model in explaining variation in returns should not be influenced by how the selective information is grouped. Fama and French (1996) claimed superiority of their model over the CAPM utilize the July 1963 to declination 1993 measure blockage with selective information groupings based on size and book-to-market truth. I will be replicating this test on the same information grouping only when covering a much doggeder pointedness (from July 1926 to June 200 6) and therefore on a different entropy grouping based on application characteristics. Testing the models using the second grouping of industry portfolios will turn over me the opportunity to ascertain whether the effectiveness of an asset pricing model is sample specific. I will excessively carry out the test by employing a much shorter purpose (5 years) and comparing it to the longer period and then using the one with the better estimate in terms of alpha and R2 to carry out out-of-sample forecasts.The rest of this paper is structured as follows. Chapter 2 will review the various models functional for the devotion of legality cost with particular emphasis on the two asset-pricing models and analysing some alert literature. Chapter 3 will give a description of the data, its source and transformations required, with Chapter 4 describing the methodology. Chapter 5 will involve the time serial publication tests of hypothesis on the data and Chapter 6 will involve an empiric al analysis of the results for the tests of the CAPM and the Fama and French three-factor model. Finally, Chapter 7 contains a summary of the major findings of my work and my recommendation as tumesce as some limitations, if any, of the study and recommended areas for further studies.2.0 RELEVANT publicationsThe estimation of the cost of justness for an industry involves estimation of what investors expect in return for their investment in that industry. That is, the cost of beauteousness to an industry is tolerable to the expected return on investors equity holdings in that industry. There are in time a host of models available for the estimation of expected returns on an industrys equity capital including but not limited to estimates from rudiments (dividends and moolah) and those from asset pricing models.2.1 Estimations from FundamentalsEstimation of expected returns or cost of equity in this case from primevals involves the use of dividends and kale. Fama and French ( 2002) used this flak to estimate expected neckcloth returns. They stated that, the expected return estimates from fundamentals servicing to judge whether the realised reasonable return is high or low relative to the expected value (pp 1). The reasoning behind this approach lies in the fact that, the add up stock return is the middling dividend yield rundown the medium regularise of capital gainA(Rt) = A(Dt/Pt-1) + A(GPt) (1)where Dt is the dividend for year t, Pt-1 is the price at the end of year t 1, GPt = (Pt Pt-1)/Pt-1 is the rate of capital gain, and A( ) indicates an average value. precondition in this situation that the dividend-price balance, Dt/Pt , is stationary (mean reverting), an alternative estimate of the stock return from fundamentals isA(RDt) = A(Dt/Pt-1) + A(GDt) (2)Where GDt = (Dt Dt-1)/Dt-1is the ingathering rate of dividends and (2) is cognize as the dividend suppu proportionalityn model which target be viewed as the expected stock return estim ate of the Gordon (1962) model. Equation (2) in theory will just apply to variables that are cointegrated with the stock price and may not hold if the dividend-price balance is non-stationary, which may be caused by firms decision to return earnings to stockholders by moving away from dividends to package repurchases (Fama and French 2002). But assuming that the ratio of earnings to price, (Yt/Pt), is stationary, then an alternative estimate of the expected rate of capital gain will be the average offshoot rate of earnings, A(GYt) = A((Yt Yt-1)/Yt-1). In this case, the average dividend yield croupe be combined with the A(GYt) to produce a third method of estimating expected stock return, the earnings out harvest-tide model given asA(RYt) = A(Dt/Pt-1) + A(GYt) (3)It stands to reason from the model in Lettau and Ludvigson (2001) that the average evolution rate of consumption can be an alternative mean of estimating the expected rate of capital gain if the ratio of consumption to stock market wealth is assumed stationary.Fama and French (2002) in their analysis cogitate that the dividend growth model has an advantage over the earnings growth model and the average stock return if the goal is to estimate the long-term expected growth of wealth. However, it is a to a greater extent generally known fact that, dividends are a policy variable and so subject to changes in management policy, which raises problems when using the dividend growth model to estimate the expected stock returns. But this may not be a problem in the long run if there is stability in dividend policies and dividend-price ratio resumes its mean-reversion (although the reversion may be at a new mean level). Bagwell and Shoven (1989) and Dunsby (1995) progress to notice that share repurchases after 1983 has been on the ascendancy, while Fama and French (2001) thrust in like manner ascertained that the proportion of firms who do not pay dividends have been increase steady since 1978. The Fama and French (2001) observation implies that in transition periods where firms who do not pay dividends increases steadily, the market dividend-price ratio may be non-stationary overtime, it is likely to decrease, in which case the expected return will likely be underestimated when the dividend growth model is used.The earnings growth model, although not superior to the dividend growth model (Fama and French (2002)), is not stirred by possible changes in dividend policies over time. The earnings growth model further may in like manner be impinge oned by non-stationarity in earnings-price ratio since it ability to faithfully estimate average expected return is based on the assumption that there are permanent shifts in the expected value of the earnings-price ratio.2.2 Estimations from addition-Pricing ModelsOne of the most fundamental concepts in the area of asset-pricing is that of risk versus observe. The pioneering work that solicited the risk and reward trade-off was d one by Sharpe (1964)-Lintner (1965), in their introduction of the detonator plus Pricing Model (CAPM). The Capital Asset Pricing Model postulates that the particular-sectional(a) variation in expected stock or portfolio returns is captured only by the market important. However, evidence from past literature (Fama and French (1992), Carhart (1997), backbreaking and Xu (1997), Jagannathan and Wang (1996), Lettau and Ludvigson (2001), and others) stipulates that the cross-section of stock returns is not fully captured by the one factor market important. knightly and present literature including studies by Banz (1981), Rosenberg et al (1985), Basu (1983) and Lakonishok et al (1994) have established that, in addition to the market genus Beta, average returns on stocks are influenced by size, book-to-market equity, earnings/price and past sales growth respectively. Past studies have also revealed that stock returns tend to display short-run pulse (Jegadeesh and Titman (1993)) an d long-term reversals (DeBondt and Thaler (1985)).Growing inquiry in this area by scholars to address these anomalies has led to the development of alternative models that better explain variations in stock returns. This led to the categorisation of asset pricing models into three (1) multifactor models that add some factors to the market return, such as the Fama and French three factor model (2) the arbitrage pricing theory postulated by Ross (1977) and (3) the nonparametric models that hard criticized the linearity of the CAPM and therefore added moments, as evidenced in the work of Harvey and Siddique (2000) and Dittmar (2002). From this categorization, most of the asset-pricing models can be described as special cases of the four-factor model proposed by Carhart (1997). The four-factor model is given asE(Ri) Rf = i + E(RM) Rf bi + si E(SMB) + hi E(HML) + wiE(WML) + i (4)where SMB, HML and WML are proxies for size, book-to-market equity and momentum respectively. There exist other variants of these models such as the three-moment CAPM and the four-moment CAPM (Dittmar, 2002) which add skewness and kurtosis to investor preferences, heretofore the direction of this paper is to compare and test the effectiveness of the CAPM and the Fama and French three-factor model, the two post-mortem asset-pricing models widely acknowledged among both practitioners and academicians.2.3 Theoretical Background CAPM and Fama French Three-Factor ModelThere exist quite a substantial amount of studies in the landing field of finance relating to these two prominent asset pricing models. The Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965) has been the runner most widely accept suppositional explanation for the estimation of expected stock returns or cost of equity in this case. It is a single factor model that is widely used by Financial Economists and in industry. The CAPM being the first theoretical asset pricing model to address the risk and r eturn concept and due to its simplicity and ease of interpretation, was quickly embraced when it was first introduced. The models attractiveness also lies in the fact that, it addressed difficult problems related to asset pricing using readily available time series data. The CAPM is based on the head of the relationship that exists surrounded by the risk of an asset and the expected return with beta being the sole risk pricing factor. The Sharpe-Lintner CAPM equation which describes respective(prenominal) asset return is given asE(Ri) = Rf + E(RM) Rf iM i = 1,,N (5)where E(Ri) is the expected return on any asset i, Rf is the risk-free interest rate, E(RM) is the expected return on the value-weighted market portfolio, and iM is the assets market beta which measures the predisposition of the assets return to variations in the market returns and it is equivalent to Cov(Ri, RM)/Var(RM).The equation for the time series regression can be written asE(Ri) Rf = i + E(RM) Rf iM + i i = 1,,N (6)showing that the excess return on portfolio i is dependent on excess market return with i as the error term. The excess market return is also referred to as the market premium.The model is based on several make out assumptions, depiction a simplified world where (1) there are no taxes or transaction costs or problems with indivisibilities of assets (2) all investors have equivalent investment horizons (3) all investors have identical opinions about expected returns, volatilities and correlations of available investments (4) all assets have limited liability (5) there exist sufficiently giving number of investors with comparable wealth levels so that each investor believes that he/she can purchase and sell any amount of an asset as he or she deems fit in the market (6) the capital market is in equilibrium and (7) Trading in assets takes place continually over time. The merits of these assumptions have been discussed extensively in literature.It is evident that most of these assumptions are the standard assumptions of a perfect market which does not exist in reality. It is a known fact that, in reality, indivisibilities and transaction costs do exist and one of the reasons assigned to the assumption of continual work models is to implicitly give intelligence to these costs. It is imperative to note moreover that, trading intervals are random and of non-constant distance and so making it unsatisfactory to assume no trading cost. As mentioned earlier, the assumptions made the model very simple to estimate (given a substitute for the market factor) and interpret, thus making it very attractive and this explains wherefore it was well embraced. The CAPM stipulates that, investors are only rewarded for the systematic or non-diversifiable risk (represented by beta) they oblige in holding a portfolio of assets. Notwithstanding the models simplicity in estimation and interpretation, it has been criticized heavily over the past few decades.Due to its many phantasmagoric assumptions and simple nature, academicians almost immediately began testing the implications of the CAPM. Studies by shadowy, Jensen and Scholes (1972) and Fama and MacBeth (1973) gave the first powerful empirical support to the use of the model for determining the cost of capital. Black et al. (1972) in combining all the NYSE stocks into portfolio and using data amidst the periods of 1931 to 1965 found that the data are consistent with the predictions of the Capital Asset Pricing Model (CAPM). employ return data for NYSE stocks for the period amidst 1926 to 1968, Fama and MacBeth (1973) in examining whether other stock characteristics such as beta square and idiosyncratic volatility of returns in addition to their betas would help in explaining the cross section of stock returns better found that knowledge of beta was sufficient.There have however been several academic challenges to the validity of the model in relation to its practical applicatio n. Banz (1981) revealed the first major challenge to the model when he provided empirical evidence to show that stocks of weakeneder firms earned better returns than predicted by the CAPM. Banzs finding was not deemed economically important by most academicians in the light that, it is unreasonable to expect an abstract model such as the CAPM to hold exactly and that the proportion of small firms to total market capital is insignificant (under 5%). Other early empirical plant by Blume and friend (1973), Basu (1977), Reinganum (1981), Gibbons (1982), Stambaugh (1982) and shanken (1985) could not offer any significant evidence in support of the CAPM.In their paper, Fama and French (2004) noted that in regressing a cross section of average portfolio returns on portfolio beta estimates, the CAPM would predict an barricade which is enough to the risk free rate (Rf) and a beta coefficient allude to the market risk premium (E(Rm) Rf). However, Black, Jensen and Scholes (1972), Blume and Friend (1973), Fama and MacBeth (1973) and Fama and French (1992) after running series of cross-sectional regressions found that the average risk-free rate, which is proxied by the one month T-bill, was always less that the realised intercept. conjecture stipulates that, the three master(prenominal) components of the model (the risk free, beta and the market risk premium) mustiness be in advance(p) estimates. That is they must be estimates of their unbowed future values. Empirical studies and abide by results however show substantial disagreements as to how these components can be estimated. While most empirical researches use the one month T-bill rate as a representative to the risk-free rate, interviews depicts that practitioners prefer to use either the 90-day T-bill or a 10-year T-bond ( ordinarily characterised by a flat yield curve). play along results have revealed that practitioners have a strong preference for long-term bond yields with over 70% of financial ad visors and corporations using Treasury-bond yields with maturities of ten 10 or more years. However, many corporations reveal that they match the tenor of the investment to the term of the risk free rate.Finance theory postulates that the estimated beta should be forward looking, so as to reflect investors uncertainty about future cash flows to equity. Practitioners are forced to use various kinds of proxies since forward-looking betas are unobservable. It is therefore a common practice to use beta estimates derived from historic data which are normally retrieved from Bloomberg, Standard Poors and Value Line. However, the lack of consensus as to which of these three to use results in different betas for the same smart set. These differences in beta estimates could result in importantly different expected future returns or cost of equity for the company in question thereby yielding conflicting financial decisions especially in capital budgeting. In the work of Bruner et al. (1998) , they found significant differences in beta estimates for a small sample of stocks, with Bloomberg providing a ascertain of 1.03 while Value Line beta was 1.24. The use of historical data however requires that one makes some practical compromises, each of which can adversely affect the quality of the results. Forinstance, the statistically reliability of the estimate may modify greatly by employing longer time series periods but this may overwhelm information that are stale or irrelevant. Empirical research over the years has shown that the precision of the beta estimates using the CAPM is greatly ameliorate when working with well diversified portfolios compared to individual securities.In relation to the equity risk premium, finance theory postulates that, the market premium should be make up to the difference between investors expected returns on the market portfolio and the risk-free rate. nearly practitioners have to grapple with the problem of how to measure the market r isk premium. Survey results have revealed that the equity market premium prompted the greatest diversity of responses among sentiment respondents. Since future expected returns are unobservable, most of the survey participants extrapolated historical returns in the future on the assumption that future expectations are heavily influenced by past experience. The survey participants however differed in their estimation of the average historical equity returns as well as their choice of proxy for the unhazardous asset. few respondents preferred the geometric average historical equity returns to the arithmetical one while some also prefer the T-bonds to the T-bill as a proxy for the riskless asset.Despite the numerous academic literatures which discuss how the CAPM should be implemented, there is no consensus in relation to the time frame and the data relative frequency that should be used for estimation. Bartholdy Peare (2005) in their paper concluded that, for estimation of beta, louvre years of monthly data is the appropriate time period and data frequency. They also found that an compeer weighted indicator, as contend to the ordinarily recommended value-weighted index provides a better estimate. Their findings also revealed that it does not sincerely affair whether dividends are included in the index or not or whether raw returns or excess returns are used in the regression equation.The CAPM has over the years been said to have failed greatly in explaining accurate expected returns and this some researchers have attributed to its many unrealistic assumptions. One other major assumption of the CAPM is that there exists complete knowledge of the true market portfolios composition or index to be used. This assumed index is to consist of all the assets in the world. However since only a small element of all assets in the world are traded on stock exchanges, it is out of the question to construct such an index leading to the use of proxies such as the S P500, resulting in ambiguities in tests.The greatest challenge to the CAPM aside that of Banz (1981) came from Fama and French (1992). Using similar procedures as Fama and MacBeth (1973) and ten size classes and ten beta classes, Fama and French (1992) found that the cross section of average returns on stocks for the periods spanning sixties to 1990 for US stocks is not fully explained by the CAPM beta and that stock risks are multidimensional. Their regression analysis suggest that company size and book-to-market equity ratio do perform better than beta in capturing cross-sectional variation in the cost of equity capital across firms. Their work was however preceded by Stattman (1980) who was the first to document a positive relation between book-to-market ratios and US stock returns. The findings of Fama and French could however not be dismissed as being economically insignificant as in the case of Banz.Fama and French therefore in 1993 identified a model with three common risk f actors in the stock return- an overall market factor, factors related to firm size (SMB) and those related to book-to-market equity (HML), as an alternative to the CAPM. The SMB factor is computed as the average return on three small portfolios (small cap portfolios) less the average return on three big portfolios (large cap portfolios). The HML factor on the other hand is computed as the average return on two value portfolios less the average return on two growth portfolios. The growth portfolio represents stocks with low Book uprightness to mart Equity ratio (BE/ME) while the value portfolios represent stocks with high BE/ME ratio. Their three-factor model equation is described as followsE(Ri) Rf = i + E(RM) Rf bi + si E(SMB) + hi E(HML) + i (7)Where E(RM) Rf, , E(SMB) and E(HML) are the factor risk premiums and bi , si and hi are the factor sensitivities. It is however believed that the introduction of these two excess factors was motivated by the works of Stattman (1980) an d Banz (1981).The effectiveness of these two models in capturing variations in stock returns may be judged by the intercept (alpha) in equations (6) and (7) above. Theory postulates that if these models hold, then the value of the intercept or alpha must equal zero for all assets or portfolio of assets. Fama and French (1997) tried the ability of both the CAPM and their own three-factor model in estimating industry costs of equity. Their test considered 48 industries in which they found that their model outperformed the CAPM across all the industries considered. They however could not conclude that their model was better since their estimates of industry cost of equities were observed to be imprecise. Another disturbing outcome of their study is that both models displayed very large standard errors in the order of 3.0% per annum across all industries.Connor and Senghal (2001) time-tested the effectiveness of these two models in predicting portfolio returns in indias stock market. They tested the models using 6 portfolio groupings formed from the intersection of two size and three book-to-market equity by examining and testing their intercepts. Connor and Senghal in this paper examined the values of the intercepts and their corresponding t-statistics and then tested the intercepts simultaneously by using the GRS statistic first introduced by Gibbons, Ross and Shanken (1989). ground on the evidence provided by the intercepts and the GRS tests, Connor and Senghal concluded generally that the three-factor model of Fama and French was superior to the CAPM.There have been other several empirical papers ever since, to ascertain which of these models is better in the estimation of expected return or cost of equity, most producing contrasting results. Howard Qi (2004) concluded in his work that on the aggregate level, the two models behave fairly well in their predictive power but the CAPM appeared to be slightly better. Bartholdy and Peare (2002) in their work cam e to the conclusion that both models performed poorly with the CAPM being the poorest.3.0 DATA SOURCESTCAPM and Three Factor Model in Cost of Equity criterionCAPM and Three Factor Model in Cost of Equity Measurement1.0 INTRODUCTION AND OBJECTIVESCentral to many financial decisions such as those relating to investment, capital budgeting, portfolio management and performance evaluation is the estimation of the cost of equity or expected return. There exist several models for the valuation of equity returns, prominent among which are the dividend growth model, residual income model and its extension, free cash flow model, the capital asset pricing model, the Fama and French three factor model, the four factor model etc. Over the past few decades, two of the most common asset pricing models that have been used for this purpose are the Capital Asset Pricing Model (a single factor model by Sharpe 1964, Lintner 1965) and the three factor model suggested by Fama and French (1993). These tw o models have been very appealing to both practitioners and academicians due to their structural simplicity and are very easy to interpret. There have however been lots of debates and articles as to which of these two models should be used when estimating the cost of equity or expected returns. The question as to which of these two models is better in terms of their ability to explain variation in returns and forecast future returns is still an open one. While most practitioners favour a one factor model (CAPM) when estimating the cost of equity or expected return for a single stock or portfolio, academics however recommend the Fama and French three factor model (see eg. Bruner et al, 1998).The CAPM depicts a linear relationship between the expected return on a stock or portfolio to the excess return on a market portfolio. It characterizes the degree to which an assets return is match to the market, and indirectly how risky the asset is, as captured by beta. The three-factor model on the other hand is an extension of the CAPM with the introduction of two additional factors, which takes into account firm size (SMB) and book-to-market equity (HML). The question therefore is why practitioners prefer to use the single factor model (CAPM) when there exist some evidence in academics in favour of the Fama and French three factor model. Considering the number of years most academic concepts are adopted practically, can we conclude that the Fama and French three factor model is experiencing this so-called natural resistance or is it the case that the Fama and French model does not perform significantly better than the CAPM and so therefore not worth the time and cost?The few questions I have posed above form the basis for this study. It is worth noting that while the huge academic studies on these models produce interesting results and new findings, the validity of the underlying models have not been rigorously verified. In this paper, while I aim to ascertain which o f the two models better estimates the cost of equity for capital budgeting purposes using regression analysis, I also will like to test whether the data used satisfy the assumptions of the method most academicians adopt, i.e. the Ordinary Least Squares (OLS) method. I will in particular be testing for the existence or otherwise of heteroscedasticity, multicollinearity, normality of errors serial correlation and unit roots, which may result in inefficient coefficient estimates, wrong standard errors, and hence inflated adjusted R2 if present in the data. I will then correct these if they exist by adopting the Generalised Least Squares (GLS) approach instead of the widely used Ordinary Least Squares (OLS) before drawing any inference from the results obtained.My conclusion as to which of the models is superior to the other will be based on which provides the best possible estimate for expected return or cost of equity for capital budgeting decision making. Since the cost of capital fo r capital budgeting is not observed, the objective here, therefore, is to find the model that is most effective in capturing the variations in stock returns as well as providing the best estimates for future returns. By running a cross sectional regression using stock or portfolio returns as the dependent variable and estimated factor(s) based on past returns as regressors, R2 measures how much of the differences in returns is explained by the estimation procedure. The model that produces the highest adjusted R2 will therefore be deemed the best.The Fama-French (1993, 1996) claimed superiority of their model over CAPM in explaining variations in returns from regressions of 25 portfolios sorted by size and book-to-market value. Their conclusion was based on the fact that their model produced a lower mean absolute value of alpha which is much closer to the theoretical value of zero. Fama and French (2004, working paper) stated that if asset pricing theory holds either in the case of t he CAPM (page 10), or the Fama and French three-factor model (page 21), then the value of their alphas should be zero, depicting that the asset pricing model and its factor or factors explain the variations in portfolio returns. Larger values of alpha in this case are not desirable, since this will imply that the model was poor in explaining variation in returns. In line with this postulation, the model that yields the lowest Mean Absolute Value of Alpha (MAVA) will therefore be considered the best. But since alpha is a random variable, I will proceed to test the null hypothesis H0 i = 0 for all i, by employing the GRS F-statistic postulated by Gibbons, Ross and Shanken (1989).My third and fourth testing measures are based on postulates by econometricians that, the statistical adequacy of a model in terms of its violations of the classical linear regression model assumptions is hugely irrelevant if the models predictive power is poor and that the accuracy of forecasts according to t raditional statistical criteria such as the MSE may give little guide to the potential profitability of employing those forecasts in a market trading outline or for capital budgeting purposes. I will therefore test the predictive power of the two models by observing the percentage of forecast signs predicted correctly and their Mean Square Errors (MSE).One other motivation for this study is also to ascertain whether the results of prior studies are sample specific, that is, whether it is dependent on the period of study or the portfolio grouping used. Theoretically, the effectiveness of an asset pricing model in explaining variation in returns should not be influenced by how the data is grouped. Fama and French (1996) claimed superiority of their model over the CAPM using the July 1963 to December 1993 time period with data groupings based on size and book-to-market equity. I will be replicating this test on the same data grouping but covering a much longer period (from July 1926 t o June 2006) and then on a different data grouping based on industry characteristics. Testing the models using the second grouping of industry portfolios will afford me the opportunity to ascertain whether the effectiveness of an asset pricing model is sample specific. I will also carry out the test by employing a much shorter period (5 years) and comparing it to the longer period and then using the one with the better estimate in terms of alpha and R2 to carry out out-of-sample forecasts.The rest of this paper is structured as follows. Chapter 2 will review the various models available for the estimation of equity cost with particular emphasis on the two asset-pricing models and analysing some existing literature. Chapter 3 will give a description of the data, its source and transformations required, with Chapter 4 describing the methodology. Chapter 5 will involve the time series tests of hypothesis on the data and Chapter 6 will involve an empirical analysis of the results for th e tests of the CAPM and the Fama and French three-factor model. Finally, Chapter 7 contains a summary of the major findings of my work and my recommendation as well as some limitations, if any, of the study and recommended areas for further studies.2.0 RELEVANT LITERATUREThe estimation of the cost of equity for an industry involves estimation of what investors expect in return for their investment in that industry. That is, the cost of equity to an industry is equal to the expected return on investors equity holdings in that industry. There are however a host of models available for the estimation of expected returns on an industrys equity capital including but not limited to estimates from fundamentals (dividends and earnings) and those from asset pricing models.2.1 Estimations from FundamentalsEstimation of expected returns or cost of equity in this case from fundamentals involves the use of dividends and earnings. Fama and French (2002) used this approach to estimate expected sto ck returns. They stated that, the expected return estimates from fundamentals help to judge whether the realised average return is high or low relative to the expected value (pp 1). The reasoning behind this approach lies in the fact that, the average stock return is the average dividend yield plus the average rate of capital gainA(Rt) = A(Dt/Pt-1) + A(GPt) (1)where Dt is the dividend for year t, Pt-1 is the price at the end of year t 1, GPt = (Pt Pt-1)/Pt-1 is the rate of capital gain, and A( ) indicates an average value. Given in this situation that the dividend-price ratio, Dt/Pt , is stationary (mean reverting), an alternative estimate of the stock return from fundamentals isA(RDt) = A(Dt/Pt-1) + A(GDt) (2)Where GDt = (Dt Dt-1)/Dt-1is the growth rate of dividends and (2) is known as the dividend growth model which can be viewed as the expected stock return estimate of the Gordon (1962) model. Equation (2) in theory will only apply to variables that are cointegrated with the stock price and may not hold if the dividend-price ratio is non-stationary, which may be caused by firms decision to return earnings to stockholders by moving away from dividends to share repurchases (Fama and French 2002). But assuming that the ratio of earnings to price, (Yt/Pt), is stationary, then an alternative estimate of the expected rate of capital gain will be the average growth rate of earnings, A(GYt) = A((Yt Yt-1)/Yt-1). In this case, the average dividend yield can be combined with the A(GYt) to produce a third method of estimating expected stock return, the earnings growth model given asA(RYt) = A(Dt/Pt-1) + A(GYt) (3)It stands to reason from the model in Lettau and Ludvigson (2001) that the average growth rate of consumption can be an alternative mean of estimating the expected rate of capital gain if the ratio of consumption to stock market wealth is assumed stationary.Fama and French (2002) in their analysis concluded that the dividend growth model has an advantage over the earnings growth model and the average stock return if the goal is to estimate the long-term expected growth of wealth. However, it is a more generally known fact that, dividends are a policy variable and so subject to changes in management policy, which raises problems when using the dividend growth model to estimate the expected stock returns. But this may not be a problem in the long run if there is stability in dividend policies and dividend-price ratio resumes its mean-reversion (although the reversion may be at a new mean level). Bagwell and Shoven (1989) and Dunsby (1995) have observed that share repurchases after 1983 has been on the ascendancy, while Fama and French (2001) have also observed that the proportion of firms who do not pay dividends have been increasing steadily since 1978. The Fama and French (2001) observation implies that in transition periods where firms who do not pay dividends increases steadily, the market dividend-price ratio may be non-stationar y overtime, it is likely to decrease, in which case the expected return will likely be underestimated when the dividend growth model is used.The earnings growth model, although not superior to the dividend growth model (Fama and French (2002)), is not affected by possible changes in dividend policies over time. The earnings growth model however may also be affected by non-stationarity in earnings-price ratio since it ability to accurately estimate average expected return is based on the assumption that there are permanent shifts in the expected value of the earnings-price ratio.2.2 Estimations from Asset-Pricing ModelsOne of the most fundamental concepts in the area of asset-pricing is that of risk versus reward. The pioneering work that addressed the risk and reward trade-off was done by Sharpe (1964)-Lintner (1965), in their introduction of the Capital Asset Pricing Model (CAPM). The Capital Asset Pricing Model postulates that the cross-sectional variation in expected stock or por tfolio returns is captured only by the market beta. However, evidence from past literature (Fama and French (1992), Carhart (1997), Strong and Xu (1997), Jagannathan and Wang (1996), Lettau and Ludvigson (2001), and others) stipulates that the cross-section of stock returns is not fully captured by the one factor market beta. Past and present literature including studies by Banz (1981), Rosenberg et al (1985), Basu (1983) and Lakonishok et al (1994) have established that, in addition to the market beta, average returns on stocks are influenced by size, book-to-market equity, earnings/price and past sales growth respectively. Past studies have also revealed that stock returns tend to display short-term momentum (Jegadeesh and Titman (1993)) and long-term reversals (DeBondt and Thaler (1985)).Growing research in this area by scholars to address these anomalies has led to the development of alternative models that better explain variations in stock returns. This led to the categorisati on of asset pricing models into three (1) multifactor models that add some factors to the market return, such as the Fama and French three factor model (2) the arbitrage pricing theory postulated by Ross (1977) and (3) the nonparametric models that heavily criticized the linearity of the CAPM and therefore added moments, as evidenced in the work of Harvey and Siddique (2000) and Dittmar (2002). From this categorization, most of the asset-pricing models can be described as special cases of the four-factor model proposed by Carhart (1997). The four-factor model is given asE(Ri) Rf = i + E(RM) Rf bi + si E(SMB) + hi E(HML) + wiE(WML) + i (4)where SMB, HML and WML are proxies for size, book-to-market equity and momentum respectively. There exist other variants of these models such as the three-moment CAPM and the four-moment CAPM (Dittmar, 2002) which add skewness and kurtosis to investor preferences, however the focus of this paper is to compare and test the effectiveness of the CAP M and the Fama and French three-factor model, the two premier asset-pricing models widely acknowledged among both practitioners and academicians.2.3 Theoretical Background CAPM and Fama French Three-Factor ModelThere exist quite a substantial amount of studies in the field of finance relating to these two prominent asset pricing models. The Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965) has been the first most widely recognized theoretical explanation for the estimation of expected stock returns or cost of equity in this case. It is a single factor model that is widely used by Financial Economists and in industry. The CAPM being the first theoretical asset pricing model to address the risk and return concept and due to its simplicity and ease of interpretation, was quickly embraced when it was first introduced. The models attractiveness also lies in the fact that, it addressed difficult problems related to asset pricing using readily available time series da ta. The CAPM is based on the idea of the relationship that exists between the risk of an asset and the expected return with beta being the sole risk pricing factor. The Sharpe-Lintner CAPM equation which describes individual asset return is given asE(Ri) = Rf + E(RM) Rf iM i = 1,,N (5)where E(Ri) is the expected return on any asset i, Rf is the risk-free interest rate, E(RM) is the expected return on the value-weighted market portfolio, and iM is the assets market beta which measures the sensitivity of the assets return to variations in the market returns and it is equivalent to Cov(Ri, RM)/Var(RM).The equation for the time series regression can be written asE(Ri) Rf = i + E(RM) Rf iM + i i = 1,,N (6)showing that the excess return on portfolio i is dependent on excess market return with i as the error term. The excess market return is also referred to as the market premium.The model is based on several key assumptions, portraying a simplified world where (1) there are no taxe s or transaction costs or problems with indivisibilities of assets (2) all investors have identical investment horizons (3) all investors have identical opinions about expected returns, volatilities and correlations of available investments (4) all assets have limited liability (5) there exist sufficiently large number of investors with comparable wealth levels so that each investor believes that he/she can purchase and sell any amount of an asset as he or she deems fit in the market (6) the capital market is in equilibrium and (7) Trading in assets takes place continually over time. The merits of these assumptions have been discussed extensively in literature.It is evident that most of these assumptions are the standard assumptions of a perfect market which does not exist in reality. It is a known fact that, in reality, indivisibilities and transaction costs do exist and one of the reasons assigned to the assumption of continual trading models is to implicitly give recognition to t hese costs. It is imperative to note however that, trading intervals are stochastic and of non-constant length and so making it unsatisfactory to assume no trading cost. As mentioned earlier, the assumptions made the model very simple to estimate (given a proxy for the market factor) and interpret, thus making it very attractive and this explains why it was easily embraced. The CAPM stipulates that, investors are only rewarded for the systematic or non-diversifiable risk (represented by beta) they bear in holding a portfolio of assets. Notwithstanding the models simplicity in estimation and interpretation, it has been criticized heavily over the past few decades.Due to its many unrealistic assumptions and simple nature, academicians almost immediately began testing the implications of the CAPM. Studies by Black, Jensen and Scholes (1972) and Fama and MacBeth (1973) gave the first strong empirical support to the use of the model for determining the cost of capital. Black et al. (1972 ) in combining all the NYSE stocks into portfolio and using data between the periods of 1931 to 1965 found that the data are consistent with the predictions of the Capital Asset Pricing Model (CAPM). Using return data for NYSE stocks for the period between 1926 to 1968, Fama and MacBeth (1973) in examining whether other stock characteristics such as beta squared and idiosyncratic volatility of returns in addition to their betas would help in explaining the cross section of stock returns better found that knowledge of beta was sufficient.There have however been several academic challenges to the validity of the model in relation to its practical application. Banz (1981) revealed the first major challenge to the model when he provided empirical evidence to show that stocks of smaller firms earned better returns than predicted by the CAPM. Banzs finding was not deemed economically important by most academicians in the light that, it is unreasonable to expect an abstract model such as t he CAPM to hold exactly and that the proportion of small firms to total market capital is insignificant (under 5%). Other early empirical works by Blume and friend (1973), Basu (1977), Reinganum (1981), Gibbons (1982), Stambaugh (1982) and shanken (1985) could not offer any significant evidence in support of the CAPM.In their paper, Fama and French (2004) noted that in regressing a cross section of average portfolio returns on portfolio beta estimates, the CAPM would predict an intercept which is equal to the risk free rate (Rf) and a beta coefficient equal to the market risk premium (E(Rm) Rf). However, Black, Jensen and Scholes (1972), Blume and Friend (1973), Fama and MacBeth (1973) and Fama and French (1992) after running series of cross-sectional regressions found that the average risk-free rate, which is proxied by the one month T-bill, was always less that the realised intercept. Theory stipulates that, the three main components of the model (the risk free, beta and the mark et risk premium) must be forward-looking estimates. That is they must be estimates of their true future values. Empirical studies and survey results however show substantial disagreements as to how these components can be estimated. While most empirical researches use the one month T-bill rate as a proxy to the risk-free rate, interviews depicts that practitioners prefer to use either the 90-day T-bill or a 10-year T-bond (normally characterised by a flat yield curve). Survey results have revealed that practitioners have a strong preference for long-term bond yields with over 70% of financial advisors and corporations using Treasury-bond yields with maturities of ten 10 or more years. However, many corporations reveal that they match the tenor of the investment to the term of the risk free rate.Finance theory postulates that the estimated beta should be forward looking, so as to reflect investors uncertainty about future cash flows to equity. Practitioners are forced to use various kinds of proxies since forward-looking betas are unobservable. It is therefore a common practice to use beta estimates derived from historical data which are normally retrieved from Bloomberg, Standard Poors and Value Line. However, the lack of consensus as to which of these three to use results in different betas for the same company. These differences in beta estimates could result in significantly different expected future returns or cost of equity for the company in question thereby yielding conflicting financial decisions especially in capital budgeting. In the work of Bruner et al. (1998), they found significant differences in beta estimates for a small sample of stocks, with Bloomberg providing a figure of 1.03 while Value Line beta was 1.24. The use of historical data however requires that one makes some practical compromises, each of which can adversely affect the quality of the results. Forinstance, the statistically reliability of the estimate may improve greatly by empl oying longer time series periods but this may include information that are stale or irrelevant. Empirical research over the years has shown that the precision of the beta estimates using the CAPM is greatly improved when working with well diversified portfolios compared to individual securities.In relation to the equity risk premium, finance theory postulates that, the market premium should be equal to the difference between investors expected returns on the market portfolio and the risk-free rate. Most practitioners have to grapple with the problem of how to measure the market risk premium. Survey results have revealed that the equity market premium prompted the greatest diversity of responses among survey respondents. Since future expected returns are unobservable, most of the survey participants extrapolated historical returns in the future on the assumption that future expectations are heavily influenced by past experience. The survey participants however differed in their estim ation of the average historical equity returns as well as their choice of proxy for the riskless asset. Some respondents preferred the geometric average historical equity returns to the arithmetic one while some also prefer the T-bonds to the T-bill as a proxy for the riskless asset.Despite the numerous academic literatures which discuss how the CAPM should be implemented, there is no consensus in relation to the time frame and the data frequency that should be used for estimation. Bartholdy Peare (2005) in their paper concluded that, for estimation of beta, five years of monthly data is the appropriate time period and data frequency. They also found that an equal weighted index, as opposed to the commonly recommended value-weighted index provides a better estimate. Their findings also revealed that it does not really matter whether dividends are included in the index or not or whether raw returns or excess returns are used in the regression equation.The CAPM has over the years bee n said to have failed greatly in explaining accurate expected returns and this some researchers have attributed to its many unrealistic assumptions. One other major assumption of the CAPM is that there exists complete knowledge of the true market portfolios composition or index to be used. This assumed index is to consist of all the assets in the world. However since only a small fraction of all assets in the world are traded on stock exchanges, it is impossible to construct such an index leading to the use of proxies such as the SP500, resulting in ambiguities in tests.The greatest challenge to the CAPM aside that of Banz (1981) came from Fama and French (1992). Using similar procedures as Fama and MacBeth (1973) and ten size classes and ten beta classes, Fama and French (1992) found that the cross section of average returns on stocks for the periods spanning 1960s to 1990 for US stocks is not fully explained by the CAPM beta and that stock risks are multidimensional. Their regress ion analysis suggest that company size and book-to-market equity ratio do perform better than beta in capturing cross-sectional variation in the cost of equity capital across firms. Their work was however preceded by Stattman (1980) who was the first to document a positive relation between book-to-market ratios and US stock returns. The findings of Fama and French could however not be dismissed as being economically insignificant as in the case of Banz.Fama and French therefore in 1993 identified a model with three common risk factors in the stock return- an overall market factor, factors related to firm size (SMB) and those related to book-to-market equity (HML), as an alternative to the CAPM. The SMB factor is computed as the average return on three small portfolios (small cap portfolios) less the average return on three big portfolios (large cap portfolios). The HML factor on the other hand is computed as the average return on two value portfolios less the average return on two g rowth portfolios. The growth portfolio represents stocks with low Book Equity to Market Equity ratio (BE/ME) while the value portfolios represent stocks with high BE/ME ratio. Their three-factor model equation is described as followsE(Ri) Rf = i + E(RM) Rf bi + si E(SMB) + hi E(HML) + i (7)Where E(RM) Rf, , E(SMB) and E(HML) are the factor risk premiums and bi , si and hi are the factor sensitivities. It is however believed that the introduction of these two additional factors was motivated by the works of Stattman (1980) and Banz (1981).The effectiveness of these two models in capturing variations in stock returns may be judged by the intercept (alpha) in equations (6) and (7) above. Theory postulates that if these models hold, then the value of the intercept or alpha must equal zero for all assets or portfolio of assets. Fama and French (1997) tested the ability of both the CAPM and their own three-factor model in estimating industry costs of equity. Their test considered 48 i ndustries in which they found that their model outperformed the CAPM across all the industries considered. They however could not conclude that their model was better since their estimates of industry cost of equities were observed to be imprecise. Another disturbing outcome of their study is that both models displayed very large standard errors in the order of 3.0% per annum across all industries.Connor and Senghal (2001) tested the effectiveness of these two models in predicting portfolio returns in indias stock market. They tested the models using 6 portfolio groupings formed from the intersection of two size and three book-to-market equity by examining and testing their intercepts. Connor and Senghal in this paper examined the values of the intercepts and their corresponding t-statistics and then tested the intercepts simultaneously by using the GRS statistic first introduced by Gibbons, Ross and Shanken (1989). Based on the evidence provided by the intercepts and the GRS tests, Connor and Senghal concluded generally that the three-factor model of Fama and French was superior to the CAPM.There have been other several empirical papers ever since, to ascertain which of these models is better in the estimation of expected return or cost of equity, most producing contrasting results. Howard Qi (2004) concluded in his work that on the aggregate level, the two models behave fairly well in their predictive power but the CAPM appeared to be slightly better. Bartholdy and Peare (2002) in their work came to the conclusion that both models performed poorly with the CAPM being the poorest.3.0 DATA SOURCEST