The Capital Asset Pricing ModelBruce D. McNevin, Ph.D.Financial Econometrics, GA.3001.008 Department of Economics New York University
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Outline•The Capital Asset Pricing Model (CAPM) –An equilibrium model of asset prices.•Testing the CAPM•Empirical Research on the Predictability of Stock Prices•Introduction to the Generalized Method of Moments–MoM and GMM•Appendix
Risk Defined•In the context of business and finance, riskis defined as the chance of suffering a financial loss.•Assets (real or financial) which have a greater chance of loss are considered more risky than those with a lower chance of loss.•Risk is sometimes used interchangeably with the term uncertaintyto refer to the variability of returns associated with a given asset.•Risk that cannot be quantified is called Knightien Risk, named after the economist Frank Knight. Economists often refer to this as economic uncertainty.