CHAPTER NINE THE CAPITAL ASSET PRICING MODEL THE

CHAPTER NINE THE CAPITAL ASSET PRICING MODEL THE

CHAPTER NINE THE CAPITAL ASSET PRICING MODEL THE CAPM ASSUMPTIONS NORMATIVE ASSUMPTIONS expected returns and standard deviation cover a one-period investor horizon nonsatiation risk averse investors assets are infinitely divisible

risk free asset exists no taxes nor transaction costs THE CAPM ASSUMPTIONS ADDITIONAL ASSUMPTIONS one period investor horizon for all risk free rate is the same for all information is free and instantaneously available homogeneous expectations

THE CAPITAL MARKET LINE THE CAPITAL MARKET LINE (CML) the new efficient frontier that results from risk free lending and borrowing both risk and return increase in a linear fashion along the CML THE CAPITAL MARKET LINE THE CAPITAL MARKET LINE

CML rP M rfr P THE CAPITAL MARKET LINE THE SEPARATION THEOREM

James Tobin identifies: the division between the investment decision and the financing decision THE CAPITAL MARKET LINE THE SEPARATION THEOREM to be somewhere on the CML, the investor initially decides to invest and based on risk preferences makes a

separate financing decision either to borrow or to lend THE MARKET PORTFOLIO DEFINITION: the portfolio of all risky assets which contains complete diversification

a central role in the CAPM theory which is the tangency portfolio (M) with the CML THE SECURITY MARKET LINE (SML) FOR AN INDIVIDUAL RISKY ASSET the relevant risk measure is its covariance with the market portfolio (i, M)

DEFINITION: the security market line expresses the linear relationship between the expected returns on a risky asset and its covariance with the market returns THE SECURITY MARKET LINE (SML) THE SECURITY MARKET LINE

rm rrf r rrf 2 m i ,m or r i rrf ( r2 rrf ) i , M where i , M i , M

2 M THE SECURITY MARKET LINE (SML) THE SECURITY MARKET LINE THE BETA COEFFICIENT an alternative way to represent the covariance of a security THE SECURITY MARKET LINE (SML)

THE SECURITY MARKET LINE THE BETA COEFFICIENT of a portfolio is the weighted average of the betas of its component securities N P , M X i i , M i 1

THE SECURITY MARKET LINE (SML) THE SECURITY MARKET LINE E(r) SML rM rrf

THE MARKET MODEL FROM CHAPTER 7 assumed return on a risky asset was related to the return on a market index i iI i1 I iI r r

THE MARKET MODEL DIFFERENCES WITH THE CAPM the market model is a single-factor model the market model is not an equilibrium model like the CAPM the market model uses a market index, the CAPM uses the market portfolio THE MARKET MODEL

MARKET INDICES the most widely used and known are S&P 500 NYSE COMPOSITE AMEX COMPOSITE RUSSELL 3000 WILSHIRE 5000 DJIA THE MARKET MODEL

MARKET AND NON-MARKET RISK Recall that a securitys total risk may be expressed as 2 i 2 iI 2 i

2 i THE MARKET MODEL MARKET AND NON-MARKET RISK according to the CAPM the relationship is identical except the market portfolio is involved instead of the market index THE MARKET MODEL

MARKET AND NON-MARKET RISK Why partition risk? market risk related to the risk of the market portfolio and to the beta of the risky asset risky assets with large betas require larger amounts of market risk larger betas mean larger returns

THE MARKET MODEL MARKET AND NON-MARKET RISK Why partition risk? non-market risk not related to beta risky assets with larger amounts of have larger E(r)

I will not According to CAPM investors are rewarded for bearing market risk not non-market risk END OF CHAPTER 9

Recently Viewed Presentations

  • Corporate PPT Template - MRC Biostatistics Unit

    Corporate PPT Template - MRC Biostatistics Unit

    Adaptive Design: Definition. An Adaptive Trial usesaccumulating data to decide how to modify aspects of the study without undermining the validityandintegrityof the trial.(PhRMA) Validity. providing correct statistical inference: adjusted p-values, estimates, confidence intervals. providing convincing results to a broader scientific...
  • Module 10 - nebula.wsimg.com

    Module 10 - nebula.wsimg.com

    Code of Ethics for Teachers. Code of Ethics. Your professional organization, and NAEYC, has written a handy guide to help you know what it means to be a professional. The Code of Ethics outlines our professional core values and describes...
  • (How) Can We Improve the Behavioral Realism of Large-Scale ...

    (How) Can We Improve the Behavioral Realism of Large-Scale ...

    Motivation (2). Now some of my best friends are people. And other best friends fit well into both groups. But I have to admit to being a V person. For example, Frank Koppelman (who turned 80 yesterday, 5/16/2017), has certainly...
  • The Puritans

    The Puritans

    In early America, the plain style aesthetic had broad cultural relevance, shaping the language of prose and poetry, the design of furniture and architecture, painting and other visual arts. Rejecting ornamental flourishes and superfluous decoration as sinful vanity, plain stylists...
  • Lorem aliquam doloripsamet - New Mexico Medicaid Portal

    Lorem aliquam doloripsamet - New Mexico Medicaid Portal

    Out of State Providers - When submitting a claim on the CMS-1500 claim form for a New Mexico Medicaid client, please attach the Prior Authorization to the claim. If the claim is submitted with the Prior Authorization number located in...
  • Jabberwocky - Alaaraji Learning Hub

    Jabberwocky - Alaaraji Learning Hub

    Look for synonyms and antonyms … The context clue may be a synonym (words with almost the same meaning) or an antonym (words opposite in meaning) for the unfamiliar word. Examples: Reducing cholesterol has a number of advantageous results. One...
  • Marisa Feil, B.A, LL.B, J.D, LL.M

    Marisa Feil, B.A, LL.B, J.D, LL.M

    A recognized immigration consultant: a member of the ICCRC (Immigration Consultants of Canada Regulatory Council) What happens to someone representing a foreign national for consideration without authorization? Penalties and fines! Indictable offence: $100,000 fine and/or 2 years in prison. Summary...
  • Fun with Vectors - Clarkson University

    Fun with Vectors - Clarkson University

    Key Points Vector algebra: addition, subtraction, scalar multiplication Geometric interpretation Unit vectors The dot product and the angle between vectors Projections (algebraic and geometric) Fun with Vectors Definition A vector is a quantity that has both magnitude and direction Examples?