Capital+Asset+Pricing

Capital+Asset+Pricing - Capital Asset Pricing Reading:...

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1 Capital Asset Pricing Reading: Chapter 9
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2 Capital Market Line (CML) p ) E(R p Rf M C A B D CML
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3 The Market Portfolio The tangency portfolio M has to be the market portfolio All assets included in this portfolio are weighted in proportion to their market value. Because Portfolio M contains all risky assets, it is a completely diversified portfolio. Only systematic risk remains in the market portfolio. Systematic risk may be measured by the standard deviation of returns on the market portfolio.
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4 The Power of Diversification Diversification depends on pair-wise correlations The marginal benefit of one additional security is its covariance with the existing portfolio
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5 Components of Risk Market (or systematic) risk : risk related to the macro economic factor or market index Unsystematic (or firm specific) risk : risk not related to the macro factor or market index Total risk = Systematic + Unsystematic
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Systematic & Non-Systematic Risk Thumb-rule: “20” securities achieves most benefits. Exposure to non-systematic risk is not associated with higher expected returns. WHY? Exposure to systematic risk is associated with higher expected returns. WHY?
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Systematic Risk & Expected Return High Systematic Risk High Required Return, but, what exactly is the relationship?
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This note was uploaded on 01/17/2012 for the course MGMT 141 taught by Professor Chernyshoff,n during the Fall '08 term at UC Irvine.

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Capital+Asset+Pricing - Capital Asset Pricing Reading:...

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