6. CAPM, SI & APT Summary

6. CAPM, SI & APT Summary - SI(realized APT ⇒...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
CAPM, Single Index Model and SI APT 1. CAPM • focus is on expected returns of a single asset held in a portfolio • model equilibrium gives ß i = Cov/ σ 2 Μ and α i = 0 • estimate α i and ß i • can have ex-post α i 0, but E( α i ) = 0 • can extend CAPM to portfolios • ß i = r i / r M 2. Single Index • focus is on realized returns • can always use the entire market as the index to be consistent with CAPM • estimate α i and ß i • The single index ß i = Cov/ σ 2 Μ . • if α = 0, then SIM = CAPM • derives concepts and quantification of systematic risk and firm-specific risk • ß i = R i / R M = r i / r M 3. APT • the APT starts with the SI model;
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: SI (realized) + APT ⇒ CAPM [E(r)] • The APT ß i = Cov/ σ 2 Μ . • as α = 0, APT produces the same SML as CAPM • ß is a portfolio sensitivity factor, not directly Cov/ σ 2 Μ . •APT arrives at the SML equation ( α = 0) for portfolios with less restrictive assumptions and a no arbitrage proof • ß i = ∆ R i / ∆ R M = ∆ r i / ∆ r M • CAPM holds for portfolios and individual assets, but APT does not guarantee that every asset lies on the SML. That is, under APT an individual asset can have an α i ≠ 0....
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online