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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
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 )
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?
E(Ri ) = rf even if σi > 0! can β be negative?...
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This note was uploaded on 01/04/2012 for the course ACTSC 372 taught by Professor Maryhardy during the Fall '09 term at Waterloo.
- Fall '09