Week 8 Tutorial - Week 8 Tutorial Emily Lo Announcement...

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Week 8 Tutorial Emily Lo
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Announcement from Henry Henry will be out of office on Thursday, there is no lecture on Thurs 1. attend one of the two lectures held two days earlier on Tuesday 2. download the mpg files and listen to/watch the pre-recorded lecture/presentation on line, and/or 3. attend the make-up lectures on Thursday, 2 June in week 13 if you find the above alternatives infeasible/inappropriate Student Communication with Henry Consultation on Tuesday from 12 noon to 2 pm Or arrange another via phone on 93855870 or email at h.yip@unsw.edu.au
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CAPM Limitations Is the market portfolio observable? - Market portfolio consists of all traded assets in the market, this includes assets that are not traded in the market Does the perfect capital market exist? Is lending rate and borrowing rate the same at the risk free rate? - individual investors have much higher risk than that associated with the Government
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Single Index Model Use market index such as S&P 500, All Ordinaries Share Price Index as valid proxies for the market portfolio R it = r it r f ; the excess return on a stock R Mt = r Mt r f ; the excess return of market index α i = a measure of mispricing β it = security’s sensitivity to the index ε it = residual return, explains the firm specific surprise in security return it Mt i i it R R ] [ ] [ ft Mt i ft it it ft Mt i i ft it r r r r r r r r According to CAPM, alpha = 0
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Mispriced Assets If α > 0, then E(r) > r f + β [E(r)-r f ], underpriced? Overpriced? If α < 0, then E(r) < r f + β [E(r)-r f ], underpriced? Overpriced? r f M   i r E SML A B C α A α C
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SIM: The components of Risk of a Stock α it is a constant, no variation and not correlated with any other variables ε it is firm specific, any variation in excess return not captured by excess market return factor, does not correlated with R mt it Mt i i it R R ) , cov(
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This note was uploaded on 01/10/2012 for the course FINS 3616 taught by Professor Curry during the Three '10 term at University of New South Wales.

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Week 8 Tutorial - Week 8 Tutorial Emily Lo Announcement...

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