Lecture 7.pptx - Lecture 7 The CAPM market efficiency The...

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Lecture 7 – The CAPM, market efficiency
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2 The CAPM _ | m * * * * * * * * * * * * * * * CML The average investor MVE portfolios f r ) ( r E m ) ( m r E
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The CAPM If the CAPM holds, the market portfolio is Mean-Variance Efficient (MVE). The weight of each security in the market portfolio will be proportional to the security’s market value. In equilibrium the benefit-to-risk ratio will be the same for each asset: 3
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The CAPM And 4 f m m im f i m f m im f i jm f j im f i r r E r r E r r E r r E r r E r r E 2 2 ) ( ) ( particular in and ) ( ) ( 2 , m m i i r r Cov
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The risk premiums of assets The expected return on any asset is given by Compensations for? 5 f m i f i r r E r r E
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6 r f r m The SML E(r) 1
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7 7 The CML vs. the SML Standard Deviation Expected Return Market Portfolio CML Portfolio Frontier RF E(RM) (M) Beta Expected Return Market Portfolio SML 1 E(RM) RF 0
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Beta estimation Usually we use the past 60 months to estimate the beta since the beta changes over time. For example, the beta of AT&T 8
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Beta estimation We run the empirical CAPM regression: 9 it f m i i f i t t t t r r r r ) ( t f m i i f i r r E r r E ) ( ) ( f m i f i i r r E r r E ) ( ) (
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Beta estimation So we conclude that in the sample period 10 f m i i f i r r r r f m i i f i r r E r r E ) ( ) (
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11 r m -r f r i -r f Estimation of beta
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12 r m -r f r i -r f Estimation of alpha and beta
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13 Excess Returns of MSFT and Market Proxy -0.1 0 0.1 -0.1 -0.05 0 0.05 0.1 Market Excess Return MSFT Excess Return 09/17/01
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14 Regression Line for MSFT -0.1 0 0.1 -0.1 -0.05 0 0.05 0.1 Market Excess Return MSFT Excess Return
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15 Gold -0.1 -0.05 0 0.05 0.1 -0.1 -0.05 0 0.05 0.1 Market Excess Return Gold Excess Return
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16 r m -r f r i -r f Estimating the beta of a portfolio
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What determines the beta?
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  • Fall '17
  • SML, event studies

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