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Unformatted text preview: What is ? A formal equation of the CAPM Applications, estimates of, and determinants of The final weeks of the quarter We are in the final weeks of the quarter Note that we are covering only parts of Chapters the rest of the quarter Chapters 13, 14, 16, and 22 Preliminary information for Test 2 Announcement on office hours for Test 2 Some TA office hours will be held in Girv 2112 next week Wed., Nov. 16, 12 pm, Brian Thomas Thu., Nov. 17, 11:55 pm, Dan Saunders 23 pm office hour on Nov. 17 will be in his office This room holds 42 students ALL students should show up to this lecture hall unless other arrangements have been made Last lecture MV We showed that only the points between MV and the green circle are worth considering Today Which point will we choose if we invest all of our money in risky assets? We define How do the returns of a stock relate to the markets returns A formal equation for CAPM Expected return is, in part, a function of Applications, estimates of, and determinants of Other issues related to from Chapter 13 Back to our twostock example MV Remember that we looked at two risky stocks We also have a risk free asset that we will now introduce Riskfree rate (R F ) Lets compare these two points Blue vs. purple MV The blue dot has a higher expected return than the purple dot Riskfree rate (R F ) The standard deviation of each point is the same Any risk averse person would prefer the blue point Adding a third investment to our portfolio MV How do we get the blue point? Riskfree rate (R F ) Invest some of our money in the mix of stocks that gets us to the pink point Invest some of our money in the riskfree asset Adding a third investment to our portfolio MV How much do we invest in each asset? Riskfree rate (R F ) The closer we are to the pink point, the more we invest in stocks The closer we are to the riskfree rate, the more we invest in this asset What about the points on the line above the pink point? MV If we are on the line above the pink point, we are assuming that we can borrow at the riskfree rate and can buy more stocks Riskfree rate (R F ) This assumption is not likely to be true for many people in the population The separation principle MV The previous steps make up the first part of what is called...
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 Fall '08
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