Unformatted text preview: ate
return
return 12% . security
market
line
line
(SML)
(SML) 1 Beta Riskfree
rate of
return
(6%) This linear relationship between
risk and required return is
known as the Capital Asset
Pricing Model (CAPM).
Pricing Required
Required
rate of
rate
return
return SML . 12% Riskfree
rate of
return
(6%) 0 1 Beta Required
Required
rate of
rate
return
return Is there a riskless
(zero beta) security? SML . 12% Riskfree
rate of
return
(6%) 0 1 Beta Required
Required
rate of
rate
return
return Is there a riskless
(zero beta) security? . 12% Riskfree
Riskfree
rate of
return
(6%) 0 1 SML Treasury
securities are
as close to riskless
as possible.
as Beta Required
Required
rate of
rate
return
return Where does the S&P 500
fall on the SML? SML . 12% Riskfree
rate of
return
(6%) 0 1 Beta Required
Required
rate of
rate
return
return Where does the S&P 500
fall on the SML? . 12% Riskfree
rate of
return
(6%) 0 1 SML The S&P 500 is
a good
good
approximation
approximation
for the market
Beta Required
Required
rate of
rate
return
return SML
Utility
Stocks 12% . Riskfree
rate of
return
(6%) 0 1 Beta Tech
stocks Required
Required
rate of
rate
return
return SML . 12% Riskfree
rate of
return
(6%) 0 1 Beta The CAPM equation:
The The CAPM equation: kj = krf + β j (km  krrff ) The CAPM equation: kj = krf + β j (km  krrff )
where:
where: kj...
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 Winter '08
 SWEO
 Capital Asset Pricing Model, Interest, Modern portfolio theory

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