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Mean Variance Analysis

# Mean Variance Analysis

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Published by: naimrahc88 on Mar 03, 2010

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10/24/2011

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16:14 Lecture 0516:14 Lecture 05MeanMean--Variance Analysis and CAPMVariance Analysis and CAPM
Eco 525: Financial Economics IEco 525: Financial Economics I
Slide 05Slide 05--11
Lecture 05: MeanLecture 05: Mean--Variance Analysis &Variance Analysis &Capital Asset Pricing ModelCapital Asset Pricing Model
((
CAPM CAPM
))
Prof. Markus K. Brunnermeier

16:14 Lecture 0516:14 Lecture 05MeanMean--Variance Analysis and CAPMVariance Analysis and CAPM
Eco 525: Financial Economics IEco 525: Financial Economics I
Slide 05Slide 05--22
OverviewOverview
Simple CAPM with quadratic utility functionsSimple CAPM with quadratic utility functions
(derived from state(derived from state-- price beta model) price beta model)
Mean-variance preferences
–Portfolio Theory CAPM
(intuition)
CAPM
Projections –Pricing Kernel and Expectation Kernel

16:14 Lecture 0516:14 Lecture 05MeanMean--Variance Analysis and CAPMVariance Analysis and CAPM
Eco 525: Financial Economics IEco 525: Financial Economics I
Slide 05Slide 05--33
Recall StateRecall State-- price Beta model price Beta model
Recall:Recall:
E[RE[R
hh
]]--RR
==
β
hh
E[RE[R
**
--RR
]]where
β
h
:= Cov[R
*
,R
h
] / Var[R
*
]
very generalvery general –  –  but what is R  but what is R
**
in realityin reality
??

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