1. Seminar Investasi dan Pasar Modal Session 3: CAPM By Dr. Ir. Sugeng Purwanto MBA,FRM Jakarta, 3 March 2010 Source : BKM (2005). “INVESTMENTS”, 6 th Edition, Chaper 1-3, Page 1-100. 1

2. CAPM (Capital Assets Pricing Mode) k = E ri = r f + β [E rm – r f ] E ri β SECURITY MARKET LINE [SML] rfrf A B C STOCK AUNDER-VALUED Price below its intrinsic value STOCK BFAIR-VALUED Price equal to its intrinsic value STOCK COVER-VALUED Price above its intrinsic value

3. Critical Reading - PGS Orientation Week - Sugeng Purwanto PhD, FRM 2.2.2010 DETERMINATION OF REQUIRED RATE OF RETURN Determination of k e by using Capital Assets Pricing Model (CAPM) k e = r f + β (E rm – r f ) k e Investors’ required rate of return r f Risk-free rate (US: T-bill, Indonesia: SBI rate) E rm Expected return of stock market (IHSG return) β Systematic risks. Sensitivity of stock price to market [IHSG] movement

4. Critical Reading - PGS Orientation Week - Sugeng Purwanto PhD, FRM 2.2.2010 STOCK INTRINSIC VALUE D 0 (1+g) P= k e - g PStock (Share) price equal Value of the firm per number of Shares k e Investors required rate of return D 0 Current year dividend per-share gSustainable growth rate 4

5. Critical Reading - PGS Orientation Week - Sugeng Purwanto PhD, FRM 2.2.2010 RELATIVE VALUATION DPR X E 0 (1+g) P = k e – g DPR (1 + g) P/E= = PER k e – g Relative Valuation P= PER x Earnings PER Price to Earnings Ratio

6. Critical Reading - PGS Orientation Week - Sugeng Purwanto PhD, FRM 2.2.2010 PER VALUATION PRICE = PER x EARNINGS PRICING METHOD:  FIND AVERAGE PER IN THE MARKET  FAIR VALUE OF SELECTED STOCK WILL BE EQUAL TO AVERAGE PER MULTIPLIED WITH FIRM’s BOOK VALUE 6

7. Critical Reading - PGS Orientation Week - Sugeng Purwanto PhD, FRM 2.2.2010

8. CONSUMPTION BASED CAPM (CCAPM) E(R M ) = α M + β MC E(R C ) – ε M