09a - 7/24/2011 Chapter9 Part1 TheCapitalAssetPricingModel...

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7/24/2011 1 Chapter 9 Part 1 Chapter 9 – Part 1 The Capital Asset Pricing Model Monday: CAPM Theory and Interpretation Read Chapter & start problems Tuesday: More graphical analysis, Examples Work on problems Wednesday: More Excel Work on spreadsheet The CAPM is a model! The CAPM Assumptions (page 281): (1) Many small investors – price takers. (2) One identical holding period. (3) Investments are limited to traded financial assets (stocks, risk-free asset). (4) No market frictions (no taxes, no transaction costs). (5 All investors are rational mean variance optimizers (5) All investors are rational mean-variance optimizers. (6) Homogeneous expectations – all see the same E- σ space.
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7/24/2011 2 The resulting equilibrium (pages 281-282) (1) All investors hold a combination of M (the market portfolio) and the The CAPM risk-free asset. (2) M is efficient. (3) Comment about risk aversion … (4) The CAPM equation (9.9):     if iM f Er r r  E Remembering Chapter 7 r f
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7/24/2011 3 E Remembering Chapter 7 r f E Remembering Chapter 7 r f
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09a - 7/24/2011 Chapter9 Part1 TheCapitalAssetPricingModel...

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