Lecture 7.pptx

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

• Notes
• 67

This preview shows page 1 - 18 out of 67 pages.

Lecture 7 – The CAPM, market efficiency
2 The CAPM _ | m * * * * * * * * * * * * * * * CML The average investor MVE portfolios f r ) ( r E m ) ( m r E
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
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
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
6 r f r m The SML E(r) 1
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
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
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 ) ( ) (
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 ) ( ) (
11 r m -r f r i -r f Estimation of beta
12 r m -r f r i -r f Estimation of alpha and beta
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
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
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
16 r m -r f r i -r f Estimating the beta of a portfolio
What determines the beta?

Want to read all 67 pages?

Want to read all 67 pages?

#### You've reached the end of your free preview.

Want to read all 67 pages?

• Fall '17
• SML, event studies

{[ snackBarMessage ]}

###### "Before using Course Hero my grade was at 78%. By the end of the semester my grade was at 90%. I could not have done it without all the class material I found."
— Christopher R., University of Rhode Island '15, Course Hero Intern

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern