Lecture25-2004 - Capital Asset Pricing Model and the...

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Unformatted text preview: Capital Asset Pricing Model and the Arbitrage Pricing Theorem Lecture XXV Deriving the Capital Asset Pricing Model E t z f r t S Using the results from the Expected Value- Standard Deviation frontier, we can derive the security market line (SML) Security Market Line (SML) [ ] i E R 1 i Which is consistent with the standard CAPM relationship Starting with a two-asset portfolio, we construct a portfolio using investment and asset . ( 29 j m E r r E r r = +- [ ] ( 29 [ ] ( 29 ( 29 ( 29 1 2 2 2 2 2 1 2 1 1 p i m p i im m E R aE R a E R R a a a a = +- = +- +- Next, we examine the risk/return relationship based on changes in the share of asset . [ ] [ ] ( 29 ( 29 ( 29 1 2 2 2 2 2 2 2 2 1 2 1 1 2 2 2 2 2 4 p i m p i im m i m m im im E R E R E R a R a a a a a a a a - & =- = +- +- &- + +- Consider what happens as the share held in asset becomes small ( 29 [ ] 2 2 1 p im m m a im m m m m m R a - =- = =- The risk/return relationship as the share in asset...
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This note was uploaded on 11/08/2011 for the course AEB 6182 taught by Professor Weldon during the Fall '08 term at University of Florida.

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Lecture25-2004 - Capital Asset Pricing Model and the...

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