ATIKAH DARAYANI NASUTION
187017023
9.1 THE CAPITAL ASSET
PRICING MODEL
The capital asset pricing model is a set
of predictions concerning equilibrium
expected returns on risky assets. The
CAPM is based on two sets of
assumptions, listed in The first set
pertains to investor behavior and
allows us to assume that investors are
alike in most important ways,
specifically that they are all mean-
variance optimizers with a common
time horizon and a common set of
information reflected in their use of an
identical input list. The second set of
assumptions pertains to the market
setting, asserting that markets are well-
functioning with few impediments to
trading.
9.2 ASSUMPTIONS AND
EXTENSIONS OF THE
CAPM
Identical Input Lists
Risk-Free Borrowing and the Zero-Beta Model
Labor Income and Nontraded Assets
A Multiperiod Model and Hegde Portfolios
A Consumption-Based CAPM
Liquidity and the CAPM
Performance Evaluation of Thematic Mutual Fund
Schemes Using Capital Asset Pricing Model (CAPM)
Dr. Anand Muley, Mr. Satish Tiwari, Dr. Jaspal
Gidwani
This study mainly focused on the performance of
selected Infrastructure equity mutual fund schemes in
terms of risk- return relationship. The main objective of
this research work is to analyze financial performance
of selected Infrastructure mutual fund schemes through
the statistical parameters such as (Average annualised
Return, beta, standard deviation, Capital Asset Pricing
Model). The findings of this research study will be help
full to investors for their future investment decisions.
Link :
http://ijsrr.co.in/images/full_pdf/1553510964_R1138.pd
f https://doi.org/10.1016/j.irfa.2019.05.002
CHAPTER 9
THE CAPITAL ASSET
PRICING MODEL
Why Do All Investors Hold the Market
Portfolio?
What is the market portfolio? When we
sum over, or aggregate, the portfolios of
all individual investors, lending and
borrowing will cancel out (because each
lender has a corresponding borrower),
and the value of the aggregate risky
portfolio will equal the entire wealth of
the economy.
Expected Returns on Individual
Securities
in the CAPM, all investors use the same
input list, that is, the same estimates of
expected returns, variances, and
covariances and, therefore, all end up
using the market as their optimal risky
portfolio.
9.3 THE CAPM AND THE
ACADEMIC WORLD
Campbell and Vuolteenaho find that the
beta of a security can be decomposed into
two components, one that measures
sensitivity to changes in corporate
profitability and another that measures
sensitivity to changes in the market’s
discount rates.
The bottom line is that, in the academic
world, the single-index CAPM is
considered passé. We don’t yet know,
however, what shape the successful
extension to replace it will take.
JOURNALS
Pricing of time-varying illiquidity within
the Eurozone: Evidence using a Markov
switching liquidity-adjusted capital asset
pricing model
Stefano Grillinia, Aydin Ozkanb , Abhijit
Sharmaa, Mazin A.M. Al Janabi
We find strong support for our conditional
L-CAPM and our results are robust to
alternative specifications and estimation
techniques. These findings have important
implications for portfolio management
practices and are relevant to portfolio and
risk managers and regulatory institutions
Link :
The Passive Strategy Is Efficient
Passive strategy of investing in a market-
index portfolio is efficient. For this
reason, we sometimes call this result a
mutual fund theorem.
The Risk Premium of the Market
Portfolio
𝐸(𝑟𝑀 ) − 𝑟𝑓
𝑦= 2
𝐴𝜎𝑀
The Security Market Line
SML is the representation of the capital
asset pricing model. It displays the
expected rate of return of an individual
security as a function of systematic, non-
diversifiable risk.
The CAPM and the Single –Index
Market
𝑅𝑖 = 𝛼𝑖 + 𝛽𝑖 𝑅𝑚 + 𝑒𝑖
9.4 THE CAPM AND THE
INVESTMENT INDUSTRY
A mountain of evidence published since
Malkiel’s study reconfirms that
professional investors on average do not
outperform passive market indexes. This
result is important. While we might
expect realized alpha values of
individual securities to center around
zero, professionally managed mutual
funds might be expected to demonstrate
average positive alphas. Funds with
superior performance (and we do expect
this set to be nonempty) should tilt the
sample average to a positive value.
Asset Pricing Model (CAPM) In Emerging
Markets: Evidences in Brics Nations and
Comparisons With Other G20
Cláudio Francisco Rezende, Vinícius Silva
Pereira, Antonio Sergio Torres Penedo
Based on the results of the regression of Panel
Data on Fixed Effects, we found evidence that
there is a statistically positive relationship
between the market risk premium and the
interest rate risk premiums. The regression
betas showed that the interest rate risk
premium is not sensitive when considering the
full sample of the G20 countries but is
sensitive in the BRICS sample.
Link :
https://futurejournal.org/FSRJ/article/view/360/439
 CHAPTER 10
ARBITRAGE PRICING
THEORY AND
MULTIFACTOR MODELS
OF RISK AND RETURN

10.1 MULTIFACTOR
MODELS: A PREVIEW 10.2 ARBITRAGE PRICING Arbitrage, Risk Arbitrage, and Equilibrium
THEORY
Factor Models of Security Returns Well-Diversified Portfolios
- The single model Ross’s APT relies on three key
𝑅𝑖 = 𝐸(𝑅𝑖 ) + 𝛽𝑖 𝐹 + 𝑒𝑖 propositions: (1) Security returns can be
described by a factor model; (2) there are The Security Market Line of the APT
sufficient securities to diversify away - Individual Assets and the APT
idiosyncratic risk; and (3) well-
- Multifactor Models functioning security markets do not
R i = E(R i ) + βiGDP GDP +βiIR IR+ei allow for the persistence of arbitrage Well- Diversified Portfolios in Practice
opportunities.

10.3 THE APT, THE CAPM, 10.4 A MULTIFACTOR APT

AND THE INDEX MODEL

The APT and the CAPM

The APT does not fully dominate the CAPM. The CAPM
We’ve noted that it is easy to think of several
provides an unequivocal statement on the expected return–beta
relationship for all securities, whereas the APT implies that this factors driven by the business cycle that might
relationship holds for all but perhaps a small number of affect stock returns: interest rate fluctuations,
securities. Because it focuses on the no-arbitrage condition, inflation rates, and so on.
without the further assumptions of the market or index model, 𝑅𝑖 = 𝐸(𝑅𝑖 ) + 𝛽𝑖1 𝐹1 + 𝛽𝑖2 𝐹2 + 𝑒𝑖
the APT cannot rule out a violation of the expected return–beta
relationship for any particular asset. For this, we need the CAPM
assumptions and its mean-variance dominance arguments.

The APT and Portfolio Optimization in a Single- 10.5 THE FAMA-FRENCH (FF)
Index Market THREE-FACTOR MODEL
The optimization process will consider both the potential
profit from a position in the mispriced asset, as well as
the risk of the overall portfolio and efficient
diversification. One example of this approach is the Fama and French
1. Estimate the risk premium and standard deviation of three-factor model and its variants, which have come
the benchmark (index) portfolio, RPM and σM. to dominate empirical research in security returns.
2. Place all the assets that are mispriced into an active
portfolio.
𝑅𝑖𝑡 = 𝛼𝑖 + 𝛽𝑖𝑆𝑀𝐵 𝑆𝑀𝐵𝑡 + 𝛽𝑖𝐻𝑀𝐿 𝐻𝑀𝐿𝑡 + 𝑒𝑖𝑡
3. To maximize the Sharpe ratio of the risky portfolio,
you maximize the information ratio of the active
portfolio.

Arbitrage Pricing Theory Model Application

JOURNALS
An Empirical Examination of the
Arbitrage Pricing Theory: Evidences
from the U.S. Stock Market
Mahdy F. Elhusseiny, Nyakundi M.
Michieka, Benjamin Bae
Empirical results show that the banking,
chemical, and telecommunication industries
show more differences in their stock
reactions to local macroeconomic risk
factors. The insurance and
telecommunication industries do not react
significantly to risk factors. However, all
the industries show strong reactions to local
market portfolio.
Link :
http://www.davidpublisher.org/Public/uplo
ads/Contribute/5c80d1821a851.pdf
Perbandingan Capital Asset Pricing Model
(CAPM) dan Arbitrage Pricing Theory
(APT) dalam Memprediksi Return Saham
Industri Pertambangan di BEI
 Fibriantiwi Fibriantiwi, Muhaimin Dimyati,
Emmy Ermawati
The results of this study indicate that the
comparison of the accuracy of the
CAPM and APT seen from the value of
Mean Absolute Deviation (MAD) which
has a very small difference. Based on
the results of the two Independent
Sample t-test conclusions can be drawn
stating that there is no significant
difference between the accuracy of
CAPM and APT in estimating the
expected return of the mining industry
companies listed on the IDX.
Link :
http://proceedings.stiewidyagamalumaja
ng.ac.id/index.php/progress/article/view/
158
on Tobacco and Cigarette Industry in
Indonesia
Sakina Ichsania , Neneng Susantia , Agatha Rinta
Suhardia
Results of the study show that there are
simultaneous effects between the variables of
exports, inflation, exchange rates, GDP, and
economic growth on stock returns. There is a
significant positive effect between economic
growth on stock returns, while there is a
significant negative effect between inflation on
stock returns and GDP on stock returns. While
exports do not affect the stock returns of the
tobacco and cigarette industry as well as the
exchange rate does not affect stock returns.
Suggestions for investors are if investors are going
to invest in the tobacco and cigarette industry, then
investors should pay attention to the
macroeconomic conditions that affect stocks,
while for companies can minimize the risks that
might occur through agreements between the
destination countries for cigarette sales.
Link : http://ojs.ijbe-
research.com/index.php/IJBE/article/view/160/pdf