Capital_Asset_Pricing_Model

# Capital_Asset_Pricing_Model - Capital Asset Pricing Model...

This preview shows pages 1–9. Sign up to view the full content.

03/21/10 Capital Asset Pricing Model 1 Capital Asset Pricing Model (CAPM) E[R i ] = R F + β i (R M R F )

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

View Full Document
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.
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

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

View Full Document
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 =3.8%
03/21/10 Capital Asset Pricing Model 5 Risk and Return Expected Return 15% 4.0% Risk 65.8% Standard Deviation | |

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

View Full Document
03/21/10 Capital Asset Pricing Model 6 Portfolio Risk and the Phantom Egg Crusher Your Portfolio Market
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.

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

View Full Document
03/21/10 Capital Asset Pricing Model 8 Risk and Return State Sun Tan Return Umbrella Return Probability of State Sunny
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 03/21/2010 for the course KNOWLEDGE 5654 taught by Professor Mr.david during the Spring '10 term at IESE Business School.

### Page1 / 25

Capital_Asset_Pricing_Model - Capital Asset Pricing Model...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online