2.7 Stud%20Week%2010%20%20lecture%201%20CAPM

2.7 Stud%20Week%2010%20%20lecture%201%20CAPM - Capital...

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Unformatted text preview: Capital Asset Pricing Model Week 10 Lecture 1 Topics Review Portfolio Risk Risk and Return Required Returns Beta CAPM Illustrating diversification effects of a stock portfolio # Stocks in Portfolio 10 20 30 40 2,000+ Diversifiable Risk Market Risk 20 Stand-Alone Risk, p p (%) 35 Firm-Specific Risk versus Market Risk Relevant risk the risk of a security that ______ _____________-its _______ risk this reflects a securitys ___________________________ __________________ Review again - Portfolio Risk The ONLY risk we are concerned about is the risk that cannot be diversified away. We are ONLY concerned about the risk of a security in the context of the risk that security adds to a well-diversified portfolio. Thus, the risk we are concerned about is the risk a security _______________ to a ________________ portfolio. Portfolio Risk-General Case The shaded boxes contain variance terms; the remainder contain covariance terms. 1 2 3 4 5 6 N 1 2 3 4 5 6 N STOCK STOCK To calculate portfolio variance add up the boxes Review (again) Portfolio Risk-General Case So, Recall Average Covariance becomes variance of a portfolio Portfolio Variance = 1 1 N N i j ij i j x x = = j i ij ij = Beta: Risk When Investors Hold a well-diversified Portfolio Since ____________ becomes the term that captures the risk of a well-diversified portfolio, we measure a stocks volatility by Beta Beta indicates how _________ is if the stock is held in a ___________. ) ( ) ( 2 , M M i i R R R Cov = Measuring Market Risk Market Portfolio - Portfolio of all assets in the economy. In practice a broad stock market index is used to represent the market....
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This note was uploaded on 12/23/2009 for the course BCOM FINC 201 taught by Professor Debrak.reed during the Spring '09 term at Canterbury.

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2.7 Stud%20Week%2010%20%20lecture%201%20CAPM - Capital...

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