09b - 7/25/2011 Chapter9 Part2 TheCapitalAssetPricingModel...

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7/25/2011 1 Chapter 9 Part 2 Chapter 9 – Part 2 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 What does it say?      9.9 if iM f Er r r    The CAPM Equation To understand we must recall the main result from Chapter 8: Total Risk = Market Risk + Residual Risk According to (9 9) E ) is a function of Market Risk but not a function of    22 2 2 8.10 pp M p  According to (9.9), ( r i ) is a function of Market Risk, but not a function of Residual Risk. (1) Eliminate residual risk (diversify) (2) Control market risk according to risk tolerance.
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7/25/2011 2 E The CML and the SML E     if iM f E rr E r r  M f Slope E r r  f r CML M SML M M Er f r M M 1 M E Chapter 8: Total Risk = Market Risk + Firm Specific Risk E Diversification: The elimination of firm specific risk. Market Risk: Total Risk: same Firm Specific Risk: f r CML M SML M f r f E E r r
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7/25/2011 3 E E
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09b - 7/25/2011 Chapter9 Part2 TheCapitalAssetPricingModel...

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