Chap009 - Investments Bodie Kane and Marcus CHAPTER 9...

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Unformatted text preview: Investments Bodie, Kane and Marcus CHAPTER 9 CHAPTER 9 The Capital Asset The Capital Asset Pricing Model Pricing Model 9-2 • It is the equilibrium model that underlies all modern financial theory • Derived using principles of diversification with simplified assumptions • Markowitz, Sharpe, Lintner and Mossin are researchers credited with its development Capital Asset Pricing Model (CAPM) 9-3 • Individual investors are price takers • Single-period investment horizon • Investments are limited to traded financial assets • No taxes and transaction costs Assumptions 9-4 • Information is costless and available to all investors • Investors are rational mean-variance optimizers • There are homogeneous expectations Assumptions Continued 9-5 • All investors will hold the same portfolio for risky assets – market portfolio • Market portfolio contains all securities and the proportion of each security is its market value as a percentage of total market value Resulting Equilibrium Conditions 9-6 • Risk premium on the market depends on the average risk aversion of all market participants • Risk premium on an individual security is a function of its covariance with the market Resulting Equilibrium Conditions Continued 9-7 Figure 9.1 The Efficient Frontier and the Capital Market Line 9-8...
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This note was uploaded on 04/19/2011 for the course FINA 513 taught by Professor Chan during the Spring '11 term at Atlantic PR.

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Chap009 - Investments Bodie Kane and Marcus CHAPTER 9...

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