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Lecture 9: The CAPM
ECON435: Financial Markets and the Macroeconomy
Anton Korinek
Spring 2011
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The Capital Asset Pricing Model
The CAPM describes:
general equilibrium in capital
markets
expected returns as a function of risk
one of the centerpieces of finance
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Simplifying Model Assumptions
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investors are price takers
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time horizon is 1 period
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all assets are publicly traded assets
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borrowing and lending at the risk free rate
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no taxes, no transactions costs
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rational, meanvariance investors
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homogenous expectations about assets
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Main Results (1/4)
All investors hold the market portfolio
Equilibrium prices and risk premia are such that
each investor finds it optimal to hold the
market portfolio
Market portfolio: sum of all portfolios
= also called “passive” portfolio
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Main Results (2/4)
The “passive” strategy is efficient
market portfolio = optimal portfolio
P* for all investors
market portfolio = tangency of
highest Capital Market Line to
efficient frontier
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Efficient Frontier and CML
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 Spring '11
 Staff
 Capital Asset Pricing Model, Market Portfolio, βi, Macroeconomy, Anton Korinek

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