The Capital Asset Pricing Model (capm)

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warning regarding systematic risks, but researchers also conclude there is a lacking of CAPM (B, John C. 2008). Firstly, lack of perspective. The measurement of Beta is base on a static method, as nowadays, a strong, efficient market requires more dynamic analysis, therefore, most investor use CAMP as a benchmark for the portfolio management. Secondly, the early warning only indicates the relative scale of the systematic risk in short period, therefore, in a medium or long-term period, CAPM is unable to guide the investors. Thirdly, the CAPM is base on past stock return and statistic approach, therefore, if the short past period were selected, then the result may not indicate the current risk, while a longer period of collect data would be costly and uneconomic.

B, John C has pointed out some factors that make CAPM unable to achieve a certain result, which provide a clue to address the missing factor in CAPM regarding price the assets in the emerging country. Don M, C. Fama, E and K French also provide background to measure the systematic risk and obtain the expect return of the asset. Vijay, S has indicated that only systematic risk is compensated to the investors and non-systematic can be eliminated by diversification, therefore, in this study, the focus is the systematic risk that global investors exposed from China regarding political uncertainty.

As the globalisation process continuing, China and U.S. economic are believed deeply depend on each other. Two countries are beneficial each other along with disputes. A threaten of a trade war by U.S. President Download Trump occurs, that would harm Chinese economic more significant than Unite State. Due to the reason of the complexity of the global supply chain, the trade war is also predicted as loss result to both China and U.S. and even affect global economic, because China is the largest processing plant in the world.

D, Ikenson (Feb 2017) believe there is not much left to stopping the Trump¡¯s trade war with China. His opinion based on large bilateral trade deficit with China; the reason behind the deficit is that China is manipulating its currency in the favour of the exporting. Another aspect of a trade war arise is that perceptions of threats to U.S. business interests increased, while perceptions of realistic opportunities diminished, such phenomenon making U.S. policy shift toward in the favour Washington by more rigorous enforcement and more trade restrictions (D, Ikenson, 2017).

Deutsche Bank research states the purpose of the trade war between U.S. and China.

1.Decrease the trade deficit

2.Increase economic growth

3.Bring manufacture back to U.S.

Deutsche Bank also states the industry that will be involved once trade war has occur; these are computer manufacture, electronic product, automotive, cloth, leather and furniture (Deutsche Bank 2016).

E, O¡¯Brien, an analysis from Bloomberg start the analysis by comparing China nowadays with Japan in the 1980s¡¯. She refers the research from the Toyo-based bank that among the Chinese top 25 exporter company to the United States, 80% of these company has a diversity of the ownership. Unlike the trade war between U.S. and Japan in the 1980s¡¯, most of the Japanese exporter are own locally in Japan (E, O¡¯Brien 2017). The globalisation allows American companies have greater access to China¡¯s market today to invest. Therefore, the conclusion is the trade war between U.S. and China will harm both parties and is unlikely to occur.

K, Bradsher (2016) from The New York Times states that to implementing trade war, there is lots restriction on U.S. Side. These include according to current Act, what is the justification to start the trade war; the period of the trade war is to be determined; the corporation from an ally of U.S., and so forth.

In conclusion, the globalisation allows capital move freely and result in diversification of equity ownership. Therefore, a policy uncertainty such as trade war may have an impaction to the stock. R Koesterich from Business Insider (2017) has claimed that political risk is elevated but not reflected. The history data indicates that policy uncertainty can explain roughly 25% of the variation in the equity volatility index (VIX) since the mid-90s¡¯. There is significant policy uncertainty risk after 2016 U.S. election, which the future direction of policy is unsure (R, Koesterich 2017).

Reference

?Vijay, S. (2016). Portfolio Risk and Return: Part II. CFA Institute.

?Don M, C. (2016). Risk Management: An Introduction. CFA Institute

?Fama,E & K French. 1992. The Cross-Section of expected Stock Returns. Journal of Fianance, vol. 47, no. 2:427-466

?B, John C. 2008. Black Monday and Black Swans. Financial Analysts Journal, vol. 64, no. 2: 30-40

?L, John. 1965. Security prices, Risks, and Maximal Gain from diversification. Journal of Finance, vol. 20, no. 4: 587-615

?Investopedia (2014) Alibaba IPO: 5 Things To Know. [online] Available:

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?Forbes (2017) Not Much Left Stopping Trump¡¯s Trade War With China. [online] Available: https://www.forbes.com/sites/danikenson/2017/02/06/not-much-left-stopping-trumps-trade-war-with-china/#44226df54d1c (accessed 18/04/2017)

?Bloomberg (2016) How China Could Dodge the Fallout From a Trade War With Trump. [online] available: https://www.bloomberg.com/news/articles/2017-03-06/china-stocks-could-dodge-u-s-trade-war-fallout-nomura-assesses (accessed 18/01/201)

?Business Insider (201) Stock won¡¯t remain calm for long. [online] Available: http://www.businessinsider.com/why-stock-market-tranquility-is-unlikely-to-last-2016-12?IR=T (accessed 18/04/2017)