what is CAPM

What is CAPM?

Capital Asset Pricing Model is rationalized by modern portfolio theory to determine the fair value of an asset. Due to it’s reliance on assumptions on an investors behaviours, the distributions of risk and returns it’s measurements are open to scrutiny from independent analysis. Therefore, when using the CAPM to evaluate your portfolio model, you should have a third party evaluate your analysis. The principles of CAPM and the efficient frontier allows you to set expectations when you place assets in your portfolio, in particular correlations between the return on investment for high risk assets.

What is the CAPM?

Poses to explain the correlation between identifiable risk and expected return of an asset or particular-kind of assets within the sector or wider market. It is an attractive method of pricing assets and attributing return on investment to riskers assets within the market.

CAPM Explained


So as ER = expected return on investment and
Rf = the risk-free rate
Bi = Beta of the investment
(ERM – RF) = market risk premium

The first assumption that you should present is that you are to be compensated for TVM of a minimum and secondly that you will be rewarded for taking on the risk since the risk-free rate accounts for TVM.

The market beta for the asset shows the risk of the asset and the impact of that risk the asset will have when added to the portfolio, in addition to the risk considered vs the overall market. For a beta greater than 1.0, it has a higher risk than the wider market and therefore should attract greater returns. For a Beta with less than 1.0 it should provide lesser returns but grant stability to the portfolio.

The Beta Coefficient

The Beta Coefficient

What is Beta?

The beta coefficient is a form of measurement for volatile movement in an individual stock, as well as systematic risk in comparison to comparable stocks or the wider market. Beta is a representation of the trajectory output of the slop calculated through regression analysis of a particular stock vs sector vs wider market.

Beta Formula (How to calculate Beta)

Re = Return on individual stock

Rm = Return on the Market.

Covariance = how changes in a stock’s returns are related to changes in the market’s returns.

Variance = how far the market’s data points spread out from their average value.

The Beta Coefficient
The Beta Coefficient

Applying (B) Beta

When a security experiences price movement ‘rubber banding’ or ‘swings’, beta justifies this activity.

You can measure Beta in three steps:

  • Identify the target of the covariance;
  • Divide the covariance against the variance of the market;
  • Over defined period;

This calculation is used to measure if there was any movement of the stock against the wider market, including the volatility-risk in comparison to its sector or wider market.

The target return used in the beta calculation must be related to the particular stock, as an investor you would be trying to ascertain the risk of that particular stock and the effect of that risk to your wider portfolio. If the stock has a strong deviation from the market, then it would add a lot of risk to your portfolio but could also provide greater return potential in comparison to lesser risk investments.

Young People will likely never own a home – it’s not their fault either.

Young People will likely never own a home – it’s not their fault either.

Young people are more in touch with their surrounding’s than ever before with their access to social media, instant news and from massive search engines like google it’s no wonder why many are giving up on the Australian dream.

It’s obvious that young people have inherited a stewing lemon and they do not have to look far online to find criticisms of their lifestyles and comments minimizing their concerns. Let’s face it, the older folks in Australia have had an easier ride.

We all agree, the older population in Australia (Majority voters in favor of negative gearing, which inflates demand for rental and sparks costs which are likely to impact young people) worked for their lifestyle. In fact, many did so without finishing high school and ‘got on with the job’.

With all that being said, older folks also benefited from lower barriers to entry into their chosen career, lower house prices. Older folks have a monopoly on the housing market and due to the dichotomy of rental demand and negative gearing for their investment properties.

There is more pressure on young people than ever as most careers require a university degree and industry experience to be considered for these ‘career-launching’ graduate programs. This is the same for trades as young people are required to earn below minimum wage for several years before becoming qualified.

Expectations are simply too high as young people often choosing between their rent and textbooks with their tradesperson counterparts struggling to meet the costs of vehicle expenses and rent.

The facts are laid out, young people will not be able to afford to purchase a house. Wages are being chewed up by inflation, rent and base living costs which makes it near impossible to save for a home. Any concerns brought forward by young people are swiftly cut down with post-truth criticism.

Looking to the people who are steering the country, they are heading towards retirement age and many of them benefit directly and indirectly from the legislation which is being passed. There appears to be little concern for the young people who cannot afford to purchase homes.

Three questions should be asked, respectfully of course:

  1. What is the average age of a parliamentarian?
  2. How many investment properties do they have now, compared to when they first sat in parliament?
  3. What is the current retirement age?

Clearly, not many journalists or voters will be brave enough to ask these questions, but we do know the answer. Now, when I talk to the older generation about career, money and etc and always ask them. “You are very good at telling me what I am doing wrong, could you tell me something that I am good at?”

That question really stops them in their tracks and show’s that there is a lot of misdirected animosity placed towards young people. That being that “all of them are lazy” or “they do not work hard enough”.

Concededly, that may be partly true but surely, in this country which toots its own horn on ‘financial success’ and ‘jobs and growth’ there isn’t an expectation of young people to simultaneously commit to a four-year bachelor’s degree and full-time work, whilst maintaining rent and car expenses and save for a home?

And that’s in the best-case scenario. Most people would struggle with part-time work and full-time study, because if we young people do not meet that golden 70% Credit Average from their degree, they are immediately excluded from graduate programs by HR software.

Yes, this article is personal. It’s personal because young people are trying to get ahead. They are trying to work hard so they can eventually work smarter, but this economy isn’t substantiable for the sole reason that it isn’t working.

The older generation complain about Centrelink payments, whilst happily cashing the rental checks from their investment properties.

The young people’s frugal movement driven by Australian dream

The young people’s frugal movement driven by Australian dream

Young people are upskilling in their personal time like you wouldn’t believe. Ask a young person about online shopping and they could write a sophisticated book on it or anything else that is being sold online.

Less young people are finishing university in pursuit of their own financial ambitions. Many are working to invest, instead of working to save and it may work in their advantage.

In the past five years you will have noticed an increase in the entrepreneurial spirit, it has swept across social media platforms like Instagram and LinkedIn.  You probably know someone who has given it a crack.

More young people now are investing in the stock market or these online based businesses taking advantage of social trends and leveraging their social networks. The barriers to entry for starting an online based business are fairly-low and decent returns on investments can be achieved from investment’s as low as $5000.

Many young people are seeing profitable results in a matter of month’s after investing in online education provided by online provides like Udemy or Brilliant. These platforms provide courses for a nominal fee and can be completed online from your smart phone or computer.

Young people continue to work in their jobs which may not pay the ideal wage, nonetheless the economic activity does ‘pave-the-way’ for reaching that ultimate goal of owning a home.

Young people understand that rent goes into someone else pocket compared to paying off a mortgage or investment property. This money sense wasn’t taught by their parents or in school most of the time but participating online.

It’s a new time in Australia, where young people are able to maintain a reasonable standard of living by investing in second income streams whilst using social media.

Young people now have access to a variety of retailors online which are shipping based, offering hygiene, clothing and other essentials for lower costs as they do not have to pass on the all the costs that traditional retailers have.

There are also apps available on smartphone which allow you to save when you spend. For example, if you make a purchase of $3.80 it will automatically round up $0.20 to be placed into a managed fund allowing you to passively save over time without hassle.

With more options for young people to save or invest for their first home, housing market participants can expect a disruption in the housing market in the next 10 years with more houses being bought with second -income rather than the traditional wage.

The question is, will young people use this income to purchase an investment property and continue to rent or would they rather purchase their first home to build equity and then purchase their investment property.

From my view, I’d rather build the passive income first with an investment property for that flexibility without being committed to a first home mortgage. My goal would be to build a second income which is equal or greater to that of my traditional job, that way I have the security of my employer as well as my side incomes. Giving my more options, convenience and flexibility with that I want to do.

Why home ownership doesn’t need to be out of reach

Why home ownership doesn’t need to be out of reach

For young Australians, housing ownership does not need to be out of reach, this isn’t going to be a condescending article with ‘the hottest regurgitated tips to save’ but will hopefully ignite some self-reflection which is overdue for many people, not just young Australians who are saving for their first home.

Many Australians are experiencing a slowdown in wage growth and as a result of job competition are less likely to negotiate a significant raise. As a result, many Australians spending less wherever they can.

Is this a bad thing? Not for the individual, on a macro-economic scale it might be, although some Australians may be counting on a recession to take advantage of lower house prices. Spending less, may be a good thing. Australian’s are slowly learning to save.

One view may be that Australian’s want to be less reliant on debt to purchase their new home and therefore see no reason to save for the minimum deposit. Perhaps, Australians are going to keep on saving, giving the banks the wake up call they need after the ‘slap on the writ commission’.

Simply, housing doesn’t need to be out of reach as we know that Australian’s are investing in education and building their second income, becoming less reliant on their traditional wages.

The increase in home and land packaged will likely make the possibility of owning new home in the coming years more of a reality. New investors and first home buyers shouldn’t get their expectations up about buying that extravagant first home – it’s out of their budget. New investors and first home buyers need to be realistic in the next coming years.

Three ways to build equity

Three ways to build equity

This article touches on three ways to build equity in your home or investment properties. If you want to build equity within your housing portfolio, you should focus on adding on extra’s to your home which add to the homes equity, get regular valuations and refinance where possible and by making use of mortgage offset accounts to maximize your offset balance.

Adding on extra’s

You can add immediate equity to your home by:

  • Building a pergola outside your backyard;
  • Adding roller shutters on your windows;
  • Getting the roof tiles recolored;
  • Getting your front lawn landscaped;
  • Getting the outside of your house repainted or if it’s a brick home getting the brick rendered; and
  • Get ducted air conditioning installed.

Get a valuation and look to refinance

You should aim to get a valuation on your property every 18 months. You can score better finance rates by paying off as much of the outstanding loans as possible whilst you get the valuation finalized. Refinancing will give you a lower interest rate, together with the additional repayments and the recent valuation, you will achieve an instant equity.

Make use of mortgage offset accounts

If you have multiple rental properties that are generating income for your and are still working full time – you may benefit from having all of your income being paid into the mortgage offset account.

The balance of the account is considered equity within the properties despite not being paid into the loans. For example, if you have a balance of $300,000 in a mortgage offset and outstanding investment loans of $900,000 you will have an outstanding loan balance of $600,000.

Deduct the loan balance of the current property valuations say, $1,500,00 would give you $900,000 in equity.


How to finance a land and building package

Typically, financing a land and building package is done one of three ways. This article will explain the ins and outs of each strategies. It’s important that you take into account your individual circumstances and seek financial advice before you make a decision about what is right for you.

Purchase the land with a mortgage

When you purchase vacant land, you may be required to build within a 3-year period. This means you have up to three years to pay down as much of the mortgage on the land as possible. As you have already purchased the land and obtained and payed off some of the mortgage. You are going to have more financial room to organize a construction loan. You should note that construction loans have higher interest rates than a traditional home loan. This is because the risk of the loan is measured against the general risk of not completing the build.

Construction Loan

You can generally borrow up to 95% of the value of the home once it has finished being built.  Construction loans draw down on the perceived value of the build, hence why their interest rates are higher. Many people wait on obtaining a construction loan in order to avoid being crippled by the interest of the mortgage on the loan and the construction loan simultaneously.

Turn-key Land and Construction Loan

These ‘Turn-Key’ loans are rather expensive, this is because you are borrowing to build on new land with a house and land package. These house and land packages can be expensive. Considering the interest rates on the construction loan and the mortgage on the land, it can be very expensive during the building period. However, once it’s built you can refinance.


What is negative gearing?

Negative gearing can be attributed to any asset but is commonly used for investment properties. Negative gearing is more of a tax strategy than an investment one; it occurs where expenses from an asset are higher than the rental income earned on the asset.

The advantage of negative gearing your investment properties is that you can deduct losses associated with your property against the income you earn from your salary. Generally, the tax policy in Australia dictates that people pay tax on their personal income, deduct expenses which nets taxable income. Hence, tax is only applied to profit not to revenue.

The ATO recognize that people have different circumstances and that people generally have different costs attributed to producing their income.

It is advantageous to make a technical loss on an investment property, whilst the property itself appreciates in value. An increase in equity is still achievable whilst making ‘interest only’ payments on the loan. Thereby still making a profit on the property.

So, we know that negative gearing is used to achieve a technical loss whilst gaining equity. It is possible to carry on this kind of strategy for many years, but you’ll have to watch out for market volatility. This kind of investment strategy is scalable, and many investors have more than one negative geared property using this strategy.

It would not be uncommon for a couple to have a few negative geared properties. So that both spouses pay little income tax.

How and when to refinance your home

How and when to refinance your mortgage

Playing the balancing game of trying to save money vs trying to grow your portfolio can be a mentally exhausting game. Finding the balance is an estimate made on a case by case situation. Anyone giving you a ‘rule of thumb’ idea or advice is guessing.

It is not going to be helpful for your situation to take advice based on pure speculation. This article will stay away from speculative ideas and instead focus on the process of refinancing your home and the material indicators of when you should do so.

Before taking the leap of marketing your situation to various banks in hopes of getting a better rate, you need to be in a relatively stable position. If you have a goal on refinancing, you need to be able to defend your reason for doing so to the bank and this is best done through a budget. It’s not enough to simply have one, you need to demonstrate to the bank that you can stick to it.

When you personal accounting is in order, you may want to make a few extra payments after refinancing to take advantage of the lower interest rates. You can make an affidavit to this effect in supporting documentation to the bank.

If you have been with your current interest arrangement for 18 months and have been prudent with your payments (as well as making additional payments where possible), it may be time to request a valuation of your property. The property valuation will help the bank ascertain the market value of our property.

You can increase you chances of being approved for refinance and getting your sought-after rate by:

  • Keeping up to date with your payments with your existing loan and making additional payments were possible;
  • Having a budget and sticking to your budget, creating a buffer of savings outside of your existing commitments;
  • Providing an affidavit to the bank explaining that you will make additional payments when approved for the lower interest rate; and
  • Getting a valuation on your property within 18 months.

After you have done so, you are likely to get refinance on your home. If you do not get the rate that you are after do not be afraid to shop around.

Why index funds out perform active funds

Why index funds outperform active funds

The efficient market hypothesis originated from an empirical observation on the activity within the stock market, in particular the consistency of individual stocks out performing active managers.

This observation documented the obvious data points on the price movement of these stocks’ vs active managers. Hence why in 1965, everything changed within financial securities market and not just for Eugene Fama.

Investors were instilled with a new sense of confidence having been told by their accountants, financial advisors, friends, family, colleagues and radio that they could have success in the stock market because the efficiency of a particular firms pricing is not necessarily determined on the basis of a company’s fundamental indictors but on the assumption that:

Because all market participants have the same access to the same information, the prediction of price movement is not a necessary exercise. Instead, investors should diversify their investments, taking advantage of market anomalies (anomalies in price movement are often attributed to legal, political and economic risks).

It is on this basis that any investor who diversifies their portfolio and makes purchases in stocks with the intention of long-term investment would outperform active managers.

What about the capital asset pricing model contradiction?

The expectation of anomalies within the EPH is consistent with prediction of price movement with stocks identified as “under-valued” in activities known as value investing.

An example of value investing would be identifying stocks within the ASX 200 and ASX 300. These stocks would then be subject to fundamental analysis and using the relative valuation models which is done by comparing the profit to equity ratio of companies within the same sector to ascertain the perceived value of the company vs the “actual value”.

Absolute valuation is an analysis based of the fundamental indicator of that particular stock and comparing companies with similar activities.

The obvious criticism of value investing is that because every stock is different many, its not possible to have success by following the same strategy for analysis when attempting to make a prediction.

The partial defense to this criticism is that because it has been identified as undervalued the question changes from “if there is a price movement” to “when there will be a price movement”, this question then becomes further scrutinized through volatility analysis, which makes semi-accurate prediction within the immediate short-term but is not as useful in the long term.

But as always, “No guarantees”.