LEC2 - ACCG329 Lecture 1 ACCG329 Lecture 2 Factor Pricing...

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ACCG329 Lecture 1 1 ACCG329 Lecture 2: Factor Pricing Models - Static CAPM and the APT 2009, Semester 1 Egon Kalotay Concepts for Revision • Assumptions • Security Market Line • CAPM beta • Systematic Risk vs Non Systematic Risk • Investor behaviour in equilibrium • 2-fund separation theorem
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ACCG329 Lecture 1 2 Last week we discussed Optimal (Mean-Variance Efficient) Portfolios: Key Assumptions Investors are risk averse individuals who seek to maximise their end of period utility. One period modeling horizon. Investors are price takers and have homogenous expectations about return means, variances and covariances. Returns are normally distributed . Investors may borrow and lend unlimited amounts at the risk-free rate of interest. Markets are frictionless , and all information is available costlessly and simultaneously to all investors. The quantity of assets is fixed, and all assets are marketable and perfectly divisible .
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ACCG329 Lecture 1 3 Key Implication The CAPM identifies the tangency portfolio of risky assets as the market portfolio • The market portfolio contains all investable assets weighted in proportion to their market value. All investors hold this portfolio. Important Insights • In equilibrium, there is no excess demand for or supply of any asset: combined with 2-fund separation, this implies that all investors hold a market value weighted portfolio of risky assets (the market) • Identification of the optimal tangency portfolio as the market portfolio: implies a market price of risk for all assets
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ACCG329 Lecture 1 4 CAPM: Empirical Tests or Tautologies? • Roll’s critique:
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LEC2 - ACCG329 Lecture 1 ACCG329 Lecture 2 Factor Pricing...

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