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UGBA103-F04-class13CAPMandfactormodels(6slides)

UGBA103-F04-class13CAPMandfactormodels(6slides) - Todays...

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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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