CAPMsim_powerpointVO

# CAPMsim_powerpointVO - Professor Susan White CAPITAL ASSET...

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Capital Asset Pricing Model Professor Susan White

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R = R + (R – R ) β C APITAL A SSET P RICING M ODEL Return on Asset i Return on risk-free rate Return on market Beta, or risk of asset i, relative to market Equation is in the form: Y = a + mx Dependent variable Y-axis intercept Slope
C APITAL A SSET P RICING M ODEL You have a security with an expected return of 13.4% β (beta)= 1.2 Risk-free rate = 5% What is the required return? Return on market: 11% = 5% + (11 - 5) x 1.2 R = R + (R – R ) β = 12.2% Overvalued or Undervalue d?

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C APITAL A SSET P RICING M ODEL The Security Market Line risk free rate Beta Required Return 12.2 11 1 1.2
C APITAL A SSET P RICING M ODEL State of Nature Probability Expected Return Boom Above average Average Below average Recession

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