lecture19 - Lecture 19: The Capital Assets Pricing Model...

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Lecture 19: The Capital Assets Pricing Model Steven Skiena Department of Computer Science State University of New York Stony Brook, NY 11794–4400 http://www.cs.sunysb.edu/ skiena
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The Capital Asset Pricing Model The Markowitz portfolio model takes as input the expected returns, volatilities, and pairwise correlations between n assets to design the optimal portfolio. But accurately estimating these ( n 2 )+2 n parameters is difficult. The Capital Asset Pricing Model (CAPM) simplifies this by relating each asset to an index (the market portfolio ). Asset values are assumed to be related to the market but uncorrelated with each other. The market portfolio is best thought of as a value weighted index of all assets (say the S&P 500).
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Beta The required rate of return for a particular asset j depends on its sensitivity to the movement of the market portfolio M (i.e. the broader market). This sensitivity is known as the asset β and reflects asset’s systematic risk. β
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lecture19 - Lecture 19: The Capital Assets Pricing Model...

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