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Risk and Return: Portfolio Theory and Asset Pricing Models
Risk and Return: Portfolio Theory and Asset Pricing Models
CHAPTER 7
Risk and Return: Portfolio Theory and
Asset Pricing Models
Capital Asset Pricing Model (CAPM)
Efficient frontier
Capital Market Line (CML)
Security Market Line (SML)
Beta calculation
Arbitrage pricing theory
Fama-French 3-factor model
Copyright © 2002 Harcourt, Inc. All rights reserved.
7-2
(More...)
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7-4
Feasible Set
Risk, p
Feasible and Efficient Portfolios
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7-6
Optimal
IA Portfolio
2
IA Investor B
1
Optimal Portfolio
Investor A
Risk p
Optimal Portfolios
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7-8
Expected Z
Return, kp
. B
^
kM
M
.
The Capital Market
kRF
A . Line (CML):
New Efficient Set
M Risk, p
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7 - 11
^
^ kM - kRF
kp = kRF + p.
M
Intercept Slope
Risk
measure
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7 - 13
^
kM
^
k R .
R
. M
R = Optimal
kRF Portfolio
R M Risk, p
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7 - 15
ki = kRF + (RPM) bi
-5 0 5 10 15 20 _
kM
-5
^
ki = -2.59 + 1.44 ^
kM
. -10
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7 - 19
Method of Calculation
(More...)
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7 - 20
2 = b2 2 + e2.
j j M j
2j = variance
= stand-alone risk of Stock j.
b2 2 = market risk of Stock j.
j M
e2 = variance of error term
j
= diversifiable risk of Stock j.
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7 - 24
(More...)
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7 - 26
Yes.
Richard Roll questioned whether it was
even conceptually possible to test the
CAPM.
Roll showed that it is virtually
impossible to prove investors behave
in accordance with CAPM theory.
It is impossible to verify.
Recent studies have questioned its
validity.
Investors seem to be concerned with
both market risk and stand-alone
risk. Therefore, the SML may not
produce a correct estimate of ki. (More...)
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7 - 29
CAPM:
ki = kRF + (kM - kRF)bi
ki = 6.8% + (6.3%)(0.9)
= 12.47%