This action might not be possible to undo. Are you sure you want to continue?

DIVYA P KRISHNAN REG NO:327

based on Markowitz model.CAPITAL ASSET PRICING MODEL William F Sharp and John Lintner developed in 1960s. Model considers relationship between risk and return for an efficient portfolio Relationship between risk and return for individual security or asset .

Assumptions Investors are rational and risk averse Investors can borrow or lend any amount of money at the risk free rate of return Investors have homogeneous expectations. They estimate identical probability distributions for future rates of return All investments are infinitely divisible There are no taxes or transaction costs involved in buying or selling assets Capital markets are in equilibrium Purchase and sales by a single investor cannot affect price .

Then investor can invest in a combination of risk free assets and risky assets. .EFFICIENT FRONTIER WITH RISKLESS LENDING AND BORROWING According to portfolio theory an investor faces an efficient frontier containing the set of efficient portfolios of risk assets If a riskless asset available for investment.then the efficient frontier transforms to straight line. When an investor use risk less borrowing and lending . The efficient frontier arising from set of portfolios of risky assets is concave in shape.

proportion of funds in riskless asset . Optimal portfolio with rate of return15 % and risk 8 % & Risk free asset with rate of return 7%. then Return of combined portfolio Rc = Rm+(1. If investor invests 40% in risk free & 60% in risky portfolio.) .expected return on risky portfolio Rf = expected return on risk less portfolio ² proportion of funds invested in risky portfolio (1.)Rf Rm.

) ² standard deviation of combined portfolio ± proportion of funds in risky portfolio m ± standard deviation of risky portfolio .standard deviation of riskless asset .Risk c= c m +(1.

40*7 =11.) =0.60*8 =4.60*15+0.risk free asset with rate of return 7 %. If an investor places 40% of his funds in risk free and 60 % in risky assets Return= Rm+(1.)Rf =0.8% .8% Risk = m+(1. Optimal portfolio with rate of return 15% and deviation 8%.

.

)R Risk= m . Return of levered portfolio= Rm -(1.a fraction of funds invested in risky portfolio If > 1.investor borrows at risk free rate and investing in risky portfolio. If the investor borrows fund to invest in risky portfolio If = 1 then investors funds are fully committed to risky portfolio If < 1.

.

.price of risk All portfolios other than efficient portfolio will lie below the CML.reward for waiting [(Rm-Rf) ¼ m] . The line formed by action of all investors mixing the market portfolio with the risk free asset is known as Capital Market Line (CML) The relationship between the return and risk of any efficient portfolio on the capital market line can be expressed as Re= Rf+[(Rm-Rf) ¼ m] e Rf .

systematic risk measured by . whether efficient or inefficient Total risk of security composed of two components systematic and unsystematic risk Diversification will reduce the unsystematic risk.SECURITY MARKET LINE CAPM specifies the relationship between expected return and risk of all securities and all portfolios. For a well diversified portfolio unsystematic risk tends to zero. <1 lower sensitivity and =1 security moves at the same rate as the market . >1 higher sensitivity.

.

SML provides relationship between expected return and of portfolio. . Ri =R + i (Rm-R ) Model postulates that systematic risk is the only important ingredient in determining expected return.

Real rate of return=[(P1 ²P0)+D1]/P0 P0 ² current market price P1 ² estimated market price D1 ² dividend of the year .PRICING OF SECURITIES WITH CAPM CAPM can be used for evaluation of pricing of securities. overpriced or correctly priced. Underpriced.

85]/83 =(7+3. the risk free rate is 5 % and the expected return on market index is 12%. A security pays a dividend of Rs.90 at the end of the year. Assess whether the security is correctly priced Expected return Ri=R + i(Rm-R ) =5+1.83.1307 13.85 and sells currently at Rs. 3. The security is expected to sell at Rs. The security has of 1.15(12-5) =5+8.05 = 13.07% .05 Estimated return = [(P1-P0)+D]/P0 =[ (90-83)+3.15.85)/83=0.

- Risk Analysis
- Markowitz Model
- paper work
- Creditratingagencycrappt 130306035605 Phpapp02 Copy
- News Brazil Mid Cap Start Trading
- Risk Analysis
- Basic Tools of Finance
- Financial Plans and Policies
- Insurance (3)
- seminario-16-09-2008
- L07S Investment Fundamentals_BB
- PPT.dps
- 2035 6597 Risk Profile Premier
- BL Global Flexible May 2015
- fcic_testimony_rubin_20100408.pdf
- wcmppt3rdsemmodule1-100628002904-phpapp02
- mutualfundsriskandreturn-130814235827-phpapp02
- 18651299 Analysts Presentation on Conversion to IFRS by Premier Oil August 25 2005
- Mortgage
- APFC Risk Based Investing Final
- Credit Rating @ Mb
- portfolio management
- 927fcWhat is a Corporate Credit Rating
- Portfolio Revision
- AMCL (Pran)
- Insurance
- fin15.ppt
- 21573sm Sfm Finalnewvol2 Cp7 Chapter 7
- CAPITAL ASSET PRICING MODEL

Are you sure?

This action might not be possible to undo. Are you sure you want to continue?

We've moved you to where you read on your other device.

Get the full title to continue

Get the full title to continue reading from where you left off, or restart the preview.

scribd