# ch13 - The Capital Asset Pricing Model Model(CAPM Yihui...

This preview shows pages 1–14. Sign up to view the full content.

The Capital Asset Pricing odel (CAPM) Model (CAPM) h t 13 -- Chapter 13 ihui Wang Yihui Wang The Capital Asset Pricing Model (CAPM)

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

View Full Document
Main Issues • Review on statistics and probability • Expected return and volatility for securities • Portfolios and diversification • Risk: systematic and unsystematic • Beta and the security market line •T h e C a pital Asset Pricing Model (CAPM) The Capital Asset Pricing Model (CAPM) 2
Random Variables • What is a random variable? = = H X ω , 0 ) ( = T , 1 The Capital Asset Pricing Model (CAPM) 3

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

View Full Document
Mean and Variance of Random Variables The Capital Asset Pricing Model (CAPM) 4
ovariance and Correlation Covariance and Correlation The Capital Asset Pricing Model (CAPM) 5

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

View Full Document
Correlation The Capital Asset Pricing Model (CAPM) 6
Important Properties The Capital Asset Pricing Model (CAPM) 7

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

View Full Document
Return and Random Variables eturn on an asset is a ndom variable aracterized by Return on an asset is a random variable, characterized by all possible outcomes R i probability of each outcome (state) p i Suppose you have predicted the following returns for stocks C and T in three possible states of nature. State Probability C T 3 Boom 0.3 15 25 Normal 0.5 10 20 Recession ??? 2 1 What is the probability of recession? What are the expected returns of stock C and T? If risk-free rate is 6.15%, what is the risk premium? The Capital Asset Pricing Model (CAPM) What are the variance and standard deviation? 8
Standard Deviation and Risk • Variance and standard deviation measure how volatile the return can be • Standard deviation is σ , it’s a measure of risk in finance, called volatility •W hich of the following three assets will you choose? The Capital Asset Pricing Model (CAPM) 9

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

View Full Document
Standard Deviation and Risk The Capital Asset Pricing Model (CAPM) 10
Portfolios • A portfolio is a collection of assets • An asset’s risk and return are important in how they affect the risk and return of the portfolio • The risk-return trade-off for a portfolio is measured by the portfolio expected return and standard deviation, just as with individual assets f l i i h f l h i d i • Portfolio weight: percentage of wealth invested in each asset The Capital Asset Pricing Model (CAPM) 11

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

View Full Document
Example: Portfolio Weights • Suppose you have \$15,000 to invest and you have purchased securities in the following amounts. What fl i ih i h i ? are your portfolio weights in each security? \$2000 of DCLK 000 of KO •DCLK: 2/15 = .133 O 3/15 = 2 \$3000 of KO \$4000 of INTC \$6000 of KEI •KO: 3/15 = .2 •INTC: 4/15 = .267 EI: 6/15 = .4 \$ KEI: 6/15 .4 The Capital Asset Pricing Model (CAPM) 12
Return and Standard Deviation of Portfolios: Example • You invest \$400 in stock X and \$600 in stock Y State Recession Normal Boom Probability 0.2 0.6 0.2 Stock X (%) -5 10 20 ock Y (%) 0 0 What is the expected return of your portfolio?

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 02/16/2011 for the course ACCT 233 taught by Professor 123 during the Spring '11 term at CUHK.

### Page1 / 47

ch13 - The Capital Asset Pricing Model Model(CAPM Yihui...

This preview shows document pages 1 - 14. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online