Lecture 4 - Chapter 7-continued Capital Asset Pricing and...

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1 CAPM & APT Chapter 7--continued Capital Asset Pricing and Arbitrage Pricing Theory
2 CAPM & APT β of a Portfolio ) ( ) ( f m i f i r r E r r E - = - β ) ( ) ( f m p f p r r E r r E - = - β ) ( ) ( ) ( 2 2 1 1 r E w r E w r E p + = 2 2 1 1 β β β w w p + = Portfolio beta is the weighted average of betas of the stocks in the portfolio For a portfolio of two assets
Application of CAPM Suppose the risk premium on the market portfolio is estimated at 8% with a standard deviation of 22%. What is the risk premium on a portfolio invested 25% in GM with a beta of 1.15 and 75% in Ford with a beta of 1.25?
Application of CAPM Two fund managers are comparing performance. One averaged a 19% return and the other a 16% return. However, the beta of the first fund was 1.5, while that of the second fund was 0.8. a. Which manager had better stock-picking skill (aside from the issue of general market risk) if the T-bill rate were 6% and the market return were 14% b. What the beta of the 1 st fund has to be for the manager to be at par with the 2 nd manager?
5 CAPM & APT

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