Chap07 - Chapter 7: Capital Asset Pricing Model (CAPM)...

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Chapter 7: CAPM 1 Chapter 7: Capital Asset Pricing Model (CAPM) Review: CAPM formula CAPM theory Assumption of CAPM Implication of CAPM Security market line CAPM and index model Beta estimation
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Chapter 7: CAPM 2 It was first proposed by William F. Sharpe, who was awarded the 1990 Nobel Prize in Economics It is a centerpiece of modern financial economics It relates the expected return of a security to its risk as measured by beta What is CAPM ] ) ( [ ) ( f M i f i r r E r r E - + = β
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Chapter 7: CAPM 3 What is Beta Provides a convenient measure of systematic risk of the volatility of an asset relative to the markets volatility. Average systematic risk, the same systematic risk as the market High systematic risk, more volatile than the market Low systematic risk, less volatile than the market β 1 = 1 1 <
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Chapter 7: CAPM 4 CAPM: Example Suppose the return on the market is expected to be 14%, a stock has a beta of 1.2, and the T-bill rate is 6%. What is the expected return on the stock?
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Chap07 - Chapter 7: Capital Asset Pricing Model (CAPM)...

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