slides12 - 12 Additional topics In these slides we briefly...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 12. Additional topics In these slides we briefly discuss • Arbitrage pricing theory (APT) • Market efficency • Behavioral finance APT • In the CAPM, expected returns depend upon just a single factor, the asset’s exposure to market risk . • But in fact, there may be several factors driving returns, and different assets may respond to changes in those variables in different ways. • Possible factors (other than market returns) that have been suggested in the literature include: – inflation – GDP growth – short-term interest rates – spread between short and long-term bonds – energy prices 2 APT — continued The arbitrage pricing model (APT) , suggested by Stephen Ross, looks similar to the CAPM, but allows for several factors. The statistical model for asset returns put forward by the APT is R A = R f + n summationdisplay i =1 b Ai λ i + n summationdisplay i =1 b Ai F i + epsilon1 where R A = the asset’s return F i = the i th factor b Ai = Asset A’s exposure to risk associated with the F i (also known as the factor loading ) λ i = the risk premium associated with F i Notes: • Factors should be normalized to mean zero. • The CAPM can be interpreted as a special case of this model (with only a single factor). 3 APT — continued As with the CAPM, the factor loadings , b Ai , are unknown, but can be estimated by linear regression . But, whereas the CAPM tells us • the factor (market excess returns) • the risk premium ( E ( r M )- r F ) APT tells us neither. The risk premia can be estimated from data. Deciding what factors to use is more or less a matter of testing different possibilities to see what seems to give good results. 4 Example — APT We would like to use a two factor APT model to estimate the expected return for Eagle Aerospace Corp. • Suppose that the risk premia are λ 1 = 3% and λ 2 = 4% . • Based on a regression analysis for Eagle’s stock returns and the two factors, we estimate that the factor loadings are β 1 = 2 and β 2 = 1 . 5 ....
View Full Document

This note was uploaded on 03/31/2008 for the course FNCE 3010 taught by Professor Donchez,ro during the Fall '07 term at Colorado.

Page1 / 21

slides12 - 12 Additional topics In these slides we briefly...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online