302 221 133 127 127 112 037 031 032 ks tanactsc

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: und ≡ Market Portfolio market portfolio is efficient CAL: E(RP ) = rf + ⇒ µrisky −rf σrisky σP E(RP ) = rf + ⇒ Capital Market Line (CML) K.S. Tan/Actsc 372 F11 E(RM ) − rf × σP σM ￿ ￿￿ ￿ market price of risk Modern Portfolio Theory & CAPM – p. 48 Result-2: CAPM Equation CAPM: The (expected) risk premium on any asset i satisfies: E(Ri ) − rf = βi [E(RM ) − rf ] where βi = Cov(Ri , RM ) σiM = 2. Var(RM ) σM βi is known as the beta of the asset i Interpretations of βi ? The risk premium on any asset is ∝ to its beta Beta is a measure of systematic risk Recall that for diversified portfolio, only systematic (or market) risk matters depends only on the “covariance", individual security variance is irrelevant K.S. Tan/Actsc 372 F11 Modern Portfolio Theory & CAPM – p. 49 CAPM: Derivation K.S. Tan/Actsc 372 F11 Modern Portfolio Theory & CAPM – p. 50 More on Beta β > 1? 0 < β < 1? β=0 E(Ri ) = rf even if σi > 0! can β be negative?...
View Full Document

This note was uploaded on 01/04/2012 for the course ACTSC 372 taught by Professor Maryhardy during the Fall '09 term at Waterloo.

Ask a homework question - tutors are online