lec02_03 - ECON 4721H Money and Banking Lecture 02_03...

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Unformatted text preview: ECON 4721H Money and Banking Lecture 02_03 Satoshi Tanaka University of Minnesota September 26, 2010 Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_03 Stock Market III -CAPM and Factor Pricing Models Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_03 Today's Questions What is the relationship between -CAPM and p = E [ mx ] ? What are factor pricing models? Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_03 Mean-Variance Frontier Rational investors always choose a portfolio which is on the capital market line. The capital market line says that if you take more risks, you will be paid more return on average . mean standard deviation R f ER m ( R m ) R m Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_03 -CAPM Formula E ( R i )- R f = i ( E ( R m )- R f ) , i = Cov ( R i , R m ) Var ( R m ) . But, the -CAPM formula tells you that not all risks are priced in the market ....
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lec02_03 - ECON 4721H Money and Banking Lecture 02_03...

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