Ch11 - Chapter 11 Capital Asset Pricing Model (CAPM) Road...

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Chapter 11 Capital Asset Pricing Model (CAPM) Road Map Part A Introduction to fnance. Part B Valuation oF assets, given discount rates. Part C Determination oF discount rates. Historic asset returns. Time value oF money. Risk. PortFolio theory. Capital Asset Pricing Model (CAPM). Arbitrage Pricing Theory (APT). Part D Introduction to corporate fnance. Main Issues Derivations oF CAPM Implications oF CAPM Empirical Evidence
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11-2 Capital Asset Pricing Model (CAPM) Chapter 11 Contents 1 In t r odu c t i on . ......................... 1 1 - 3 2 Th eM a r k e tP o r t f o l i o...................... 1 1 - 4 3 D e r i v a t i ono fCAPM . ..................... 1 1 - 5 3 . 1 AN um e r i c a lI l l u s t r a t i o no ................ 1 1 - 6 3 . 2 AF o rm a lD e r i v a t i o .................. 1 1 - 8 3.3 Implications of CAPM . . . . . . . ................. 1 1 - 9 4 Und e r s t and in gR i s kinCAPM . 1 1 - 1 2 5 App l i c a t i on so .................... 1 1 - 1 8 6 Empirical Evaluation of CAPM . . . . . . . . . . . . . . . . . 11-20 7 Summ a r yo fCAPM. ...................... 1 1 - 2 3 8 end i xA :C ap i t a lM a r k e tL e ............... 1 1 - 2 4 9 i xB :E x t en s i .............. 1 1 - 2 5 9 . 1 M u l t i f a c t o rCAPM . ........................ 1 1 - 2 5 9.2 Consumption CAPM (CCAPM) . . ................. 1 1 - 2 8 1 0 H om ew o r k ........................... 1 1 - 3 1 15.407 Lecture Notes Fall 2003 c ° Jiang Wang
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Chapter 11 Capital Asset Pricing Model (CAPM) 11-3 1 Introduction Portfolio theory analyzes investors’ asset demand given asset returns. This chapter studies how investors’ asset demand determines the relation between assets’ risk and return in a market equilibrium (when demand equals supply). I A model to price risky assets. Main question of this chapter E r i ] = ? Main points of portfolio theory 1. Diversify to eliminate non-systematic risk. 2. Hold only the risk-free asset and the tangent portfolio. 3. An asset’s systematic risk is measured by contribution to the risk of the tangent portfolio – its beta β i T . 4. An asset’s risk premium is proportional to its systematic risk: ¯ r i r F = β i T r T r F ) . I Identifying the tangent portfolio gives a pricing model. c ° Jiang Wang Fall 2003 15.407 Lecture Notes
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11-4 Capital Asset Pricing Model (CAPM) Chapter 11 2 The Market Portfolio Defnition : The market portFolio is the portFolio oF all risky assets traded in the market. Defnition : The market capitalization oF an asset is its total market value. Suppose there are a total oF i =1 ,...,n risky assets. Asset i ’s market capitalization is MCAP i = (price per share) i × (# oF shares outstanding) i . The total market capitalization oF all risky assets is MCAP M = n X i =1 MCAP i . The market portFolio is the portFolio with weights in each risky asset i being w i = MCAP i n j =1 MCAP j = MCAP i MCAP M . We denote the market portFolio by w M . 15.407 Lecture Notes ±all 2003 c ° Jiang Wang
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Chapter 11 Capital Asset Pricing Model (CAPM) 11-5 3 Derivation of CAPM Assumptions for this chapter: 1. Investors agree on the distribution of asset returns. 2. Investors have the same Fxed (static) investment horizon.
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This note was uploaded on 01/19/2011 for the course 15 15.407 taught by Professor Wang during the Fall '03 term at MIT.

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Ch11 - Chapter 11 Capital Asset Pricing Model (CAPM) Road...

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