Lecture 8 Oct 3 2011

Lecture 8 Oct 3 2011 - FINA3104:...

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FINA 3104: Itt Al i d Pt f l i M Investment Analysis and Portfolio Management Lecture 8 – The Capital Asset Pricing Model (CAPM) Darwin Cho Darwin Choi October 3, 2011 Recap from Last Lecture Optimal Risky Portfolio, Optimal Complete Portfolio Diversification Combining securities lowers portfolio risk Markowitz Selection: N Risky Assets Efficient Frontier Passive Investing as a Strategy Why do people trade so much? 2
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Course Intended Learning Outcome Course Intended Learning Outcomes Once you have completed this course, you should be able to: Allocate money across different asset classes in a scientific manner manner. Price financial securities on the basis of fundamental financial principles principles. Determine whether a portfolio manager is doing a good job. Manage a portfolio consisting of fixed income securities. Manage a portfolio consisting of fixed income securities. Price, trade, and use derivative securities (futures and options). Perform financial analysis using Microsoft Office Excel and the REUTERS financial database. 3 Outline of Today’s Lecture Outline of Today s Lecture CAPM In Brief – Implications & Uses CAPM Assumption CAPM Assumptions Market Portfolio Market Risk Premium & Risk Aversion CAPM as Equilibrium Reward to Risk Security Market Line & Stock Pickin Security Market Line & Stock Picking 4
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Ci t l At Pii Md Capital Asset Pricing Model Equilibrium Expected Return on Security E = E + x ( r x ) [ ( r M ) – r f ] x r f Market risk premium : reward for holdin Riskfree return : reward for inflation and Beta : Covariance of reward for holding the optimal risky market portfolio deferred consumption without risk. x with the market divided by market portfolio variance (price of risk) (quantity of risk) 5 Lecture 6: Complete Portfolio Return E( r C ) = y E( r P ) + (1 – y ) r f E( r C ) = r f + y [E( r P ) – r f ] Risk premium: Riskfree return: reward for inflation and Risk reward for taking risk (price of risk) deferred consumption without risk. weight (quantity of risk taken) 6
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The CAPM in Brie The CAPM in Brief The Centerpiece of Financial Economics Relates asset risk to expected return Says one risky portfolio suits everyone Helps identify mi priced securitie
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Lecture 8 Oct 3 2011 - FINA3104:...

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