capm - Chapter 7 Capital Asset Pricing Theory (CAPM)...

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     Chapter 7 Capital Asset Pricing Theory (CAPM)
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     Capital Asset Pricing Model (CAPM) Equilibrium model that underlies all modern financial theory Derived using principles of diversification with simplified assumptions Markowitz, Sharpe, Lintner and Mossin are researchers credited with its development
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     Resulting Equilibrium Conditions All investors will hold the same portfolio for risky assets – market portfolio Market portfolio contains all securities and the proportion of each security is its market value as a percentage of total market value
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     Risk premium on the market depends on the average risk aversion of all market participants Risk premium on an individual security is a function of its covariance with the market Resulting Equilibrium Conditions (cont.)
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     CAPM – Key implications There is a linear relationship between expected return for a security and the market risk premium: E(R i ) – r f = β i [E(R m
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This note was uploaded on 05/10/2008 for the course FIN 367 taught by Professor Han during the Spring '08 term at University of Texas.

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capm - Chapter 7 Capital Asset Pricing Theory (CAPM)...

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