Capital Asset Pricing Model - Capital Asset Pricing Model...

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Capital Asset Pricing Model: Essentials of Investment Analysts and Portfolio Management
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An Introduction to Asset Pricing Models Questions to be answered: What are the assumptions of the capital asset pricing model? What is a risk-free asset and what are its risk-return characteristics? What is the covariance and correlation between the risk-free asset and a risky asset or portfolio of risky assets?
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An Introduction to Asset Pricing Models What is the expected return when you combine the risk-free asset and a portfolio of risky assets? What is the standard deviation when you combine the risk-free asset and a portfolio of risky assets? When you combine the risk-free asset and a portfolio of risky assets on the Markowitz efficient frontier, what does the set of possible portfolios look like?
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An Introduction to Asset Pricing Models Given the initial set of portfolio possibilities with a risk-free asset, what happens when you add financial leverage (that is, borrow)? What is the market portfolio, what assets are included in this portfolio, and what are the relative weights for the alternative assets included? What is the capital market line (CML)? What do we mean by complete diversification?
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An Introduction to Asset Pricing Models How do we measure diversification for an individual portfolio? What are systematic and unsystematic risk? Given the capital market line (CML), what is the separation theorem? Given the CML, what is the relevant risk measure for an individual risky asset? What is the security market line (SML) and how does it differ from the CML?
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An Introduction to Asset Pricing Models What is beta and why is it referred to as a standardized measure of systematic risk? How can you use the SML to determine the expected (required) rate of return for a risky asset? Using the SML, what do we mean by an undervalued and overvalued security, and how do we determine whether an asset is undervalued or overvalued?
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An Introduction to Asset Pricing Models What is an asset s characteristic line and how do you compute the characteristic line for an asset? What is the impact on the characteristic line when you compute it using different return intervals (e.g., weekly versus monthly) and when you employ different proxies (i.e., benchmarks) for the market portfolio (e.g., the S&P 500 versus a global stock index)?
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Capital Market Theory: An Overview Capital market theory extends portfolio theory and develops a model for pricing all risky assets Capital asset pricing model (CAPM) will allow you to determine the required rate of return for any risky asset
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Assumptions of Capital Market Theory 1) All investors are Markowitz efficient investors who want to target points on the efficient frontier.
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