Tutor profile: Sanjay S.

What is the difference between Valuation Models and Asset Pricing Models?

Asset pricing models yield the required return (the cost of capital), not the value of an asset. An asset pricing model is a beta technology. Valuation models, on the other hand, yield the value of an asset. As this value can be compared with price, a valuation model is an alpha technology.

How does passive investment strategy differ from active investment strategy?

Passive investor believe the markets are efficient and hence follow a buy and hold strategy. Active investors believe that the markets are not efficient all the time and hence there is mispricing of securities that can be exploited to gain abnormal returns by conducting fundamental analysis of stocks

How is systematic risk different from unsystematic risk?

Systematic risk is that part of firms earning volatility related to the market. Unsystematic risk is unrelated to the market and depends purely on the firm; hence it is firm specific