CAPM EZ - Capital Market Equilibrium and the Capital Asset...

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1 Capital Market Equilibrium and the Capital Asset Pricing Model Econ 422 Investment, Capital & Finance Spring 2010 ECON 422:CAPM 1 © 2006 R.W.Parks/E. Zivot June 1, 2010 The Risk of Individual Assets Investors require compensation for bearing Investors require compensation for bearing risk. 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 2 © 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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2 The Risk of Individual Assets (continued) For people holding a diversified portfolio it is 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 3 © 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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This note was uploaded on 12/21/2011 for the course ECON 422 taught by Professor Staff during the Fall '08 term at University of Washington.

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CAPM EZ - Capital Market Equilibrium and the Capital Asset...

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