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Capital Market Equilibrium and
the Capital Asset Pricing Model
Econ 422
Investment, Capital & Finance
Spring 2010
ECON 422:CAPM
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© 2006
R.W.Parks/E. Zivot
June 1, 2010
The Risk of Individual Assets
Investors require compensation for bearing
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Investors require compensation for bearing
risk.
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We have seen that the standard deviation of
the rate of return is an appropriate measure
of risk for one’s portfolio.
Standard deviation is no the best measure of
ECON 422:CAPM
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© 2006
R.W.Parks/E. Zivot
•
Standard deviation is not
the best measure of
risk for individual assets when investors hold
diversified portfolios.
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The Risk of Individual Assets (continued)
For people holding a diversified portfolio it is
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For people holding a diversified portfolio it is
the contribution of the individual asset to the
portfolio’s standard deviation that matters.
•
[If your portfolio involved only one asset, e.g.
young Bill Gates the portfolio standard
ECON 422:CAPM
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© 2006
R.W.Parks/E. Zivot
young Bill Gates, the portfolio standard
deviation would be the standard deviation of
the single asset.]
The contribution of an individual
asset to the portfolio’s standard
deviation: Beta
Beta measures the sensitivity of an asset’s
•
Beta measures the sensitivity of an asset s
rate of return to variation in the market
portfolio’s return.
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 Fall '08
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 Market Equilibrium, Capital Asset Pricing Model, Financial Markets, Modern portfolio theory

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