ch09 - 9-1 Lecture IV Chapter 9 (7th/8th/9thedition) 9-2...

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Unformatted text preview: 9-1 Lecture IV Chapter 9 (7th/8th/9thedition) 9-2 Lecture IV – p.2 FIN 6275 It is the equilibrium model that underlies all modern financial theory. Derived using principles of diversification with simplified assumptions. Markowitz, Sharpe, Lintner and Mossin are researchers credited with its development. Capital Asset Pricing Model (CAPM) 9-3 Lecture IV – p.3 FIN 6275 Assumptions Individual investors are price takers Single-period investment horizon Investments are limited to traded financial assets No taxes and transaction costs Information is costless and available to all investors Investors are rational mean-variance optimizers There are homogeneous expectations 9-4 Lecture IV – p.4 FIN 6275 1)All investors will hold the same portfolio for risky assets – market portfolio. 2)Market portfolio contains all securities and the proportion of each security is its market value as a percentage of total market value. Resulting Equilibrium Conditions9-5 Lecture IV – p.5 FIN 6275 3)Risk premium on the the marketdepends on the average risk aversionof all market participants. 4)Risk premium on an individualsecurity is a function of its covariancewith the market. Resulting Equilibrium Conditions (cont’d) 9-6 Lecture IV – p.6 FIN 6275 1) Capital Market Line E(r) E(rM) rf M CML σm σ•Common portfolio due to homogeneous expectations‘ •‘Mutual Fund Theorem’= Separation Property •Passive Investment is efficient 9-4 Lecture IV – p.4 FIN 6275 1)All investors will hold the same portfolio for risky assets – market portfolio. 2)Market portfolio contains all securities and the proportion of each security is its market value as a percentage of total market value. Resulting Equilibrium Conditions9-5 Lecture IV – p.5 FIN 6275 3)Risk premium on the the marketdepends on the average risk aversionof all market participants. 4)Risk premium on an individualsecurity is a function of its covariancewith the market....
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This note was uploaded on 02/29/2012 for the course FINA 6275 taught by Professor Gerganajostova during the Spring '12 term at GWU.

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ch09 - 9-1 Lecture IV Chapter 9 (7th/8th/9thedition) 9-2...

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