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Capital_Asset_Pricing_Model - Capital Asset Pricing...

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03/21/10 Capital Asset Pricing Model 1 Capital Asset Pricing Model (CAPM) E[R i ] = R F + β i (R M R F )
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03/21/10 Capital Asset Pricing Model 2 Risk and Return State Probability Company A Return Company B Return Boom .3 100% 20% Normal .4 15% 15% Recession .3 -70% 10% 1.0 1. Find the expected return for Company A and B. 2. Find the standard deviation for Company A and B.
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03/21/10 Capital Asset Pricing Model 3 Find Expected Return State Probability Company A Return Company B Return Boom .3 100% 20% Normal .4 15% 15% Recession .3 -70% 10% 1.0 15% .3(10) .4(15) .3(20) ) E(R 15% .3(-70) .4(15) .3(100) ) E(R A = + + = = + + = B
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03/21/10 Capital Asset Pricing Model 4 Find Standard Deviation State Probability Company A Return Company B Return Boom .3 100% 20% Normal .4 15% 15% Recession .3 -70% 10% 1.0 [ ] [ ] 2 1 2 2 2 B 2 1 2 2 2 A 15) - .3(10 15) - .4(15 15) - .3(20 65% 15) - .3(-70 15) - .4(15 15) - .3(100 + + = = + + = σ σ =3.8%
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03/21/10 Capital Asset Pricing Model 5 Risk and Return Expected Return 15% 4.0% Risk 65.8% Standard Deviation | |
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03/21/10 Capital Asset Pricing Model 6 Portfolio Risk and the Phantom Egg Crusher Your Portfolio Market
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03/21/10 Capital Asset Pricing Model 7 Lessons from P.E.C. 1. Assets are not held in isolation; rather, they are held as parts of portfolios. 2. Assets are priced according to their value in a portfolio. 3. Investors are concerned about how the portfolio of stocks perform--not individual stocks.
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03/21/10 Capital Asset Pricing Model 8 Risk and Return State Sun Tan Return Umbrella Return Probability of State Sunny 33% -9% 1/3 Normal 12% 12% 1/3 Rainy -9% 33% 1/3 Expected return for Sun Tan Company = 12%
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