Seaoil Philippines, Incorporated Screening Tool For Management Trainee Applicants

SEAOIL PHILIPPINES, INCORPORATED
SCREENING TOOL FOR MANAGEMENT TRAINEE APPLICANTS

NAME: LEO D. JAY BACARISAS
Please answer the following questions.
The Capital Asset Pricing Model is traditionally used for pricing financial assets,
however, its application is vast.
1. In the context of CAPM, discuss the risk/expected return profile of
industries specializing in each of the 5 levels of Maslow's Hierarchy of
Needs. Provide examples of industries that fall within each level.
The five levels of Maslows Hierarchy of Needs are physiological, safety,
social, esteem and self-actualization. There are specific industries that
falls within each level. Physiological needs industries like food and drinks
manufacturer. Safety needs industries like bank deposits or insurance.
Social needs industries like telecommunication. Esteem needs industries
like sports. Lastly the self-actualization needs industries like cinema or
theater. In general industries specializing in each of the 5 levels of
Maslow's Hierarchy of Needs can used CAPM to calculate the expected
return on a security based on its level of risk. For example, Leo has a
deposit in a safety bank which has an interest rate of 5% then he has
been offered to be involved in a business of food and drinks company
which also has an interest rate of 5% if he will join. Leo would not invest
on that food and drink company knowing the risk of his investment.
Investors can use the CAPM formula to determine if the investment is not
too risky to be involved with. If during the calculation of the CAPM and
the result is that the risk is not too high then surely the investor would
push through his plans. Each investor chooses an investment that
maximizes his or her utility. This leads to an efficient distribution of risk in
the economy, given, of course, the distribution of wealth among
investors. The CAPM theory briefly explains that an investor could earn
more once he invests in one stock than a riskier stock.
2. How can you apply the CAPM model to Strategy, Marketing and HR?
When it comes to strategic planning problem of the firm involves two
interdependent decisions. First, management must decide which
businesses in the investment should be retained and which businesses
should be removed. Second, for those businesses retained in or added
to the investment, management must decide on the amount to be
invested in each business. Under the CAPM framework, the primary
strategic objective of management in making these two
interdependent decisions is to maximize the expected value of the
firm's common stock.
In Marketing and HR, CAPM model can be used in order to determine
the efficiency of the risk the company is going to engage if its rate of
return is higher than the initial then its worth doing so. Specific
example for marketing is when you market a certain product. You
must make sure that the investment you put to that product will be
worth it. You will not engage into marketing that certain product
knowing that there is no assurance of getting higher returns of your
investment. Using the CAPM then the risk and the rate of return can
be determined. Same as in HR, they use CAPM to determine the risk of
certain investment the company is going to be involved in order to
know ahead of time if the investment is worth the risk or not.
3. Define the CAPM parameters needed in order for an arbitrage to exist.
Arbitrage is the practice of taking advantage of a price difference
between two or more markets. Striking a combination of matching deals
that capitalize upon the imbalance, the profit being the difference
between the market prices. When used by academics, an arbitrage is a
transaction that involves no negative cash flow at any probabilistic or
temporal state and a positive cash flow in at least one state in other
words it is the possibility of a risk-free profit at zero cost. Arbitrage
involves the possibility of getting something for nothing while having no
possibility of loss. In order for an arbitrage to exist the investment you
invest must be risk free. One of the CAPM parameter is the risk free rate.
By definition risk-free interest rate is the theoretical rate of return of an
investment with no risk of financial loss. One interpretation is that the
risk-free rate represents the interest that an investor would expect from
an absolutely risk-free investment over a given period of time. So in order
for arbitrage to exist the risk free rate must be high.

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SEAOIL PHILIPPINES, INCORPORATED

SCREENING TOOL FOR MANAGEMENT TRAINEE APPLICANTS

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