Lecture6 - Lecture 6 Capital Asset Pricing Model Lecture 6,...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture 6, BUS 136, Investments, UCR 1 Lecture 6 Capital Asset Pricing Model
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Lecture 6, BUS 136, Investments, UCR 2 The Capital Asset Pricing Model The CAPM is a centerpiece of modern finance that gives predictions about the We will first look at the concept of diversification.
Background image of page 2
Lecture 6, BUS 136, Investments, UCR 3 Diversification: Two-Asset Example: Suppose you hold two risky assets in your risky portfolio, IBM and GE. Let the fraction of IBM be w and the fraction of GE be (1- w ) If w = 1, you hold only IBM, If w = 0, you hold only GE, If w = .5, you have an equally weighted portfolio.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Lecture 6, BUS 136, Investments, UCR 4 IBM GE Portfolio Random Return Expected Return Std deviation Correlation in Returns 0.02% 8.67% 0.95% 6.68% 0.2592 B R A R P R ? P σ ( 29 ? P R E The Two Asset Portfolio
Background image of page 4
Lecture 6, BUS 136, Investments, UCR 5 The expected return of the portfolio is simply: Hence, expected return on an equally weighted portfolio is: ( 29 ( 29 ( 29 B A P R E w R wE R E ) 1 ( - + = ( 29 % 49 . 0 % 95 . 0 5 . 0 % 02 . 0 5 . 0 = × + × = P R E The Two Asset Portfolio –Expected Return
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Lecture 6, BUS 136, Investments, UCR 6 The Two Asset Portfolio: Risk Risk is measured typically by the standard deviation. The standard deviation of a portfolio is not a simple sum of the individual assets’ standard deviations. Instead, it is the square root of variance given by: AB B A 2 B 2 2 A 2 2 p ) (1 2 ) (1 ρ σ - + - + = w w w w ( 29 t coefficien n correlatio the is , B A B A AB R R Cov where =
Background image of page 6
Lecture 6, BUS 136, Investments, UCR 7 Diversification: Two-Asset The standard deviation of the 50%/50% portfolio is: The portfolio risk is lower than either individual asset’s because of diversification . Diversification is more effective when the two assets are
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/15/2008 for the course BUS 136 taught by Professor Na during the Winter '08 term at UC Riverside.

Page1 / 23

Lecture6 - Lecture 6 Capital Asset Pricing Model Lecture 6,...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online