Why Risky Assets Are Doing So Well (CAPM)

Описание: Since the stock market crash, risky assets/risky investments have performed exceptionally well (focusing on stocks and cryptocurrencies). This video explores why assets like Tesla, Nio, MGM, Bitcoin, Ethereum and Dogecoin have had so much money invested in them, causing meteoric market price rises.

To help understand why risky assets are doing so well, I focus on the Capital Asset Pricing Model (CAPM). I start by explaining what a stock Beta is, which is essentially the sensitivity of the stock to the market’s movements. So, the higher the Beta, the more sensitive the stock is and therefore, the higher risk there is when investing in the asset. It is noted that cryptocurrencies (Bitcoin, Ethereum, dogecoin etc) cannot accurately have a Beta value, as their price movements are mostly uncorrelated to the stock market. However, we will assume that they have a high beta for the CAPM due to the high risk associated with investments into crypto assets.

I introduce and explain the Capital Asset Pricing Model (CAPM), focusing on the security market line, the risk-free rate (treasury bills rate), and the market portfolio. I show how investors that are looking to get market-beating returns (10-15%) need to invest in assets that have a higher risk (higher beta value) than the market (beta value of 1.0). When the T-Bill rate got dropped from around 2% to 0.01% because of the market crash and economic impact during March 2020, this dropped the security market line. This is as the market risk premium (the difference between the risk-free return and market return) stays relatively consistent. This means that if investors want to continue getting the returns that they were used to getting before the market crash, they need to invest in riskier assets (assets with a higher Beta). I visually demonstrate this in the video with an animation.

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Disclaimer: All ideas presented within this video are that of my own based on my own opinions. Please do not consider any of these videos as financial advice as I am NOT a financial advisor. All financial decisions and choices made are solely your responsibility. The views shared in this video are just for entertainment purposes only.