Extraction of a Mathematical Capital Asset Pricing Model within the Framework of Mental Accounting

Subject Areas : Financial Knowledge of Securities Analysis

Mohammadreza  Ola ¹ (PhD of Accounting, Islamic Azad University, Science and Research Branch, Tehran, Iran)
Hashem  Nikoomaram ² (Professor of Accounting, Islamic Azad University, Science and Research Branch, Tehran, Iran)
Azita  Jahanshad ³ (Associate Professor, Central Tehran Branch, Islamic Azad University)
Zahra  Pourzamani ⁴ (Associate Professor, Central Tehran Branch, Islamic Azad University)

Received: 2016-08-13 Accepted : 2016-10-01 Published : 2017-12-22

Keywords: Capital Asset Pricing Model, mental accounting, Threshold Return, Probability of Failing, Mental Account Beta, Mental Account Risk Premium,

Abstract :

Ordinary investors do not look to their portfolio as a whole. These investors consider their portfolio as a set of mental arithmetic. In mental accounting, the conventional issue of maximizing the expected return is faced with the constraint of maximum likelihood to fail in achieving the return threshold. The present study extracts the capital asset pricing model from Markowitz Mean-Variance Portfolio Model and risk-free asset entering the limitations of this model. Then, MA-CAPM model is extracted by creating a mathematical equivalence between the components of this model and the limitation of mental accounting. In this model, expected investment return for any purpose presented in the form of mental arithmetic is a function of the return on risk-free asset, beta and risk premium of mental arithmetic where the risk premium of mental arithmetic equals the difference between returns of each account and risk-free return on assets. Expected rate of return on assets in the MA-CAPM will be influenced by return threshold and likelihood to fail in reaching this threshold, i.e. mental arithmetic risk.

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