Lecture9 - The Capital Asset Pricing Model Lecture 9: The...

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1 1 Lecture 9: The CAPM ECON435: Financial Markets and the Macroeconomy Anton Korinek Spring 2011 2 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 3 Simplifying Model Assumptions 1. investors are price takers 2. time horizon is 1 period 3. all assets are publicly traded assets 4. borrowing and lending at the risk free rate 5. no taxes, no transactions costs 6. rational, mean-variance investors 7. homogenous expectations about assets 4 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 5 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 6 Efficient Frontier and CML
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Lecture9 - The Capital Asset Pricing Model Lecture 9: The...

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