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Lecture27-2004 - Empirical Applications of Capital Market...

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Empirical Applications of Capital Market Models Lecture XXVII
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Capital Asset Pricing Models A basic question that must be addressed in the application of both CAPM and APT models is whether a risk-free asset exists.
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In the basic Sharpe-Lintner CAPM model [ ] [ ] ( 29 [ ] [ ] , i f im m f i m im m E R R E R R Cov R R Var R β β = + - =
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[ ] [ ] ( 29 i f im m f E R R E R R β - = - [ ] [ ] i i f i i i m i m m f Z E R R Z Z Z E R R α β ε = - = + + = -
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Constructing a dataset of 43 stocks from the Center for Research into Security Prices (CRSP) dataset, using the return on the Standard and Poors 500 portfolio and using the 3 month treasury bill as the market portfolio
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Sharpe-Lintner Results 11499 12140 15553 18542 19166 19749 α i 0.00651 -0.00267 0.00757 0.00223 0.00092 -0.00465 (0.01459) (0.00522) (0.00324) (0.00494) (0.00539) (0.01091) β i 1.03884 1.39450 0.30513 0.99853 1.08365 -0.00807 (0.31641) (0.11317) (0.07028) (0.10708) (0.11686) (0.23661)
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Black’s Model An alternative to the model presented by Sharpe and Lintner is the zero-beta model suggested by Black where R 0 m is the return on the zero-beta portfolio, or the minimum variance portfolio that is uncorrelated with the market portfolio [ ] [ ] [ ] [ ] ( 29 0 0 i m im m m E R E R E R E R β = + -
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