Lecture #21

# Lecture #21 - Ec 136 Financial Economics Lecture 21...

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Unformatted text preview: Ec 136, Financial Economics Lecture 21 November 17 Outline for today 1. CAPM beta-representation 2. Security market line 3. CAPM tests 4. Factor models www.econ.berkeley.edu/~szeidl/ec136/ec136index.htm Readings: BKM Chapter 9.1, 10.1-10.2, 11.1-11.5 (9.1-9.4, 10.1-10.5 in editions 7&8) Problem set 7 : due November 19, Thurs, in class. 1. CAPM beta representation & For any asset return R i E R i ¡ R f = & i & E R m ¡ R f ¡ where R m is return on the market portfolio and & i = cov ( R i ; R m ) var ( R m ) can be estimated from time series regression R i ¡ R f = ¡ i + & i ¢ & R m ¡ R f ¡ + " i : & Intuition for covar: by adding ¢ i of R i to portfolio, change in var: var h R m + ¢ i ¢ & R i ¡ R f ¡i = = £ 2 m + ¢ 2 i ¢ £ 2 i + 2 ¢ i ¢ cov [ R m ; R i ] £ £ 2 m + 2 ¢ i ¢ cov [ R m ; R i ] : Proof logic & Consider two simultaneous portfolio shifts, into asset i and into asset j ....
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Lecture #21 - Ec 136 Financial Economics Lecture 21...

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