Using Capital Asset Pricing Model (CAPM) analysis of Chinese stock

Using Capital Asset Pricing Model (CAPM) Analysis of Chinese Stock
Name Course Instructor Date
Hengrui Medicine
Jiangsu Hengrui Medicine Co., Ltd (SHA: 600276) is listed on the Shanghai stock exchange as part of the SSE Composite Index. Hengrui Medicine partners with other institutions to support research to develop innovative therapies and drugs through research. China’s public traded companies are classified under three primary categories: series “A” shares, series “B” shares, and series “H” shares. Series A shares are the local Chinese companies denominated in the yuan renminbi (CNY). They are mostly traded among local investors on the Shanghai or Shenzhen stock exchanges, and Jiangsu Hengrui Medicine Co. Ltd. is in the series A shares category.
Capital Asset Pricing Model (CAPM)
The CAPM model (Capital Asset Pricing Model) is a financial asset valuation model that allows estimation of the expected return based on systematic risk. In this model, there is a linear relationship between the expected return and risk that the investor bears with the beat coefficient signifying the systematic risk, and the rest of the risk can be eliminated through diversification. Gurufocus (2020) estimates the Expected future annual return in China as 5.3%.
The Company’s beta is estimated at 0.38 and indicates that the company’s stock is less volatile than the market index, which in this case is the S & P 500. A 100% increase in the market index will result in Hengrui Medicine’s stock to rise by 38%. Since the stock beta is .38, so it can be considered as not being investment sensitive to market movements. Still, we can expect the stock to move in the same direction as the market, but changes at a smaller percentage. The CAPM approach is also used to predict the risk of an asset, separating them into systematic risk and unsystematic risk. Systematic risk refers to the general economic uncertainty, the environment, and is what can be controlled. The unsystematic risk, on the other hand, is a specific risk of the company or the industry.
China’s 10-year government bond is at 3.32%, and the central bank rate that was last modified in April 2020 is 3.85% (World government bonds, 2020). On the other hand, China’s 1 Year Government Bond is estimated at 3.038 %, and this is used as the risk-free rate of interest (Market watch, 2020). China’s 10-year government bond is at 3.32%, and the c...