1
class #13
page 1
CAPM & Factor Models
class #13
class #13
page 2
Today’s culture quiz
•
Who is this person ?
•
William F. Sharpe
1990 Nobel Prize
•
One of the developers
of the CAPM (along
with John Lintner
and Jack Treynor.)
class #13
page 3
Today’s plan
•
Review CAPM
•
Where can we find a stock’s Beta ?
•
Talk about model uncertainty and multi-factor models
class #13
page 4
Our goal
•
What is a major goal of this course ?
•
To learn:
–
how to value a project under consideration
–
how to value an entire company
•
Module I:
how to calculate NPV of CFs (given “r”)
•
Module II:
how to calculate the correct “r”
•
Module III:
put everything together
T
T
3
3
2
2
1
1
0
)
r
1
(
C
)
r
1
(
C
)
r
1
(
C
)
r
1
(
C
C
NPV
+
+
+
+
+
+
+
+
+
−
=
K
class #13
page 5
std. dev
return
4%
8%
12%
16%
20%
4%
8%
12%
16%
24%
28%
rf=7.0%
Problem #1
•
Given the graph below, can we find the market portfolio?
What is the expected return and standard deviation ?
r
m
=14%
σ
m
=16%
class #13
page 6
beta
return
0.25
0.50
0.75
1.00
1.25
4%
8%
12%
16%
1.50
1.75
rf=7.0%
Problem #2
•
Given the expected return on the market is 14% and the
risk free rate is 7.0%, can we draw the SML?
r
m
=14%
β
m
=1.00

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