lecture 16

lecture 16 - Lecture 16 1 The Capital Asset Pricing Model 2...

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Prof Irvine FINA 4310 Lecture # 16 1) The Capital Asset Pricing Model 2) The Security Characteristic Line 3) Project 2
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Prof Irvine FINA 4310 Stocktrak short sale l You must enter into a short position in a security for at least $25,000 in short proceeds. l You must hold this position for at least 48 hours l If you have already executed such a transaction then you are exempt l Enter into this transaction by 4:00pm October 15, 2010.
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Prof Irvine FINA 4310 Market Portfolio r f Efficient Market Portfolio E(R) f p
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Prof Irvine FINA 4310 Market Portfolio l Since all investors have identical beliefs, all investors hold the same risky portfolio l The market portfolio is the optimal risky portfolio
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Prof Irvine FINA 4310 Capital Market Line
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Prof Irvine FINA 4310 Resulting Equilibrium Conditions l All investors will hold the same portfolio for risky assets – market portfolio l Market portfolio contains all securities and the proportion of each security is its market value as a percentage of total market value. l The market portfolio must then be well-diversified l Firm-specific risk will NOT contribute significantly to portfolio risk
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Prof Irvine FINA 4310 CAPM l Capital Asset Pricing Model - Delivers, under certain assumptions, the expected returns for individual stocks as ( 29 ( 29 ( 29 t f t M i t f t i r r E r r E , , , , - + = β where: rf ,t : risk free rate rM,t : return on the value-weighted portfolio of all stocks ( 29 ( 29 t M t M t i i r Var r r Cov , , , , = (beta)
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Prof Irvine FINA 4310 Example l Risk free rate rf , t = 0.5% per month l Monthly expected return on market portfolio E ( rM , t ) = 1.5 % l Beta β KO , t = 0.5 ( 29 ( 29 ( 29 ( 29 % 1 01 . 0 005 . 0 015 . 0 5 . 0 005 . 0 , , , , , = = - + = - + = t f t M t KO t f t KO r r E r r E β
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Prof Irvine FINA 4310 Expected Return and Risk on Individual Securities l The risk premium on individual securities is a function of the individual security’s contribution to the risk of the market portfolio l Individual security’s risk premium is a function of the covariance of returns with the market portfolio
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Prof Irvine FINA 4310 CAPM Formula ( 29 ( 29 ( 29 ( 29 ( 29 ( 29 t M t f t M t M t i t f t M i t f t i r Var r r E r r Cov r r E r r E , , , , , , , , , , - = - = - β Market Portfolio’s Excess Return Asset i ’s Excess Return
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This note was uploaded on 06/05/2011 for the course FINA 4310 taught by Professor Staff during the Fall '08 term at UGA.

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lecture 16 - Lecture 16 1 The Capital Asset Pricing Model 2...

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