The Capital Asset Pricing Model

May 12th, 2015
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CAPM: Assumptions and Implications and Equation SML and CML. • How are expected returns determined? • How are they related to risk?

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Lecture07InvestmentTheoryElenaPikulinaOverviewFromPortfolioTheory tothe CAPMInvestment TheoryThe Capital Asset Pricing ModelCAPM: Assumptionsand ImplicationsThe CAPMEquationSML andCMLElena PikulinaSauder School of BusinessUniversity of British ColumbiaBeta andAlpha1 / 29General OverviewInvestmentTheoryElenaPikulinaOverviewFromPortfolioTheory tothe CAPMCAPM: Assumptionsand ImplicationsThe CAPMEquationSML andCMLBeta andAlpha In the previous lecture (Portfolio Theory) we studied how to choose astock portfolio. A crucial input was the expected return of each stock. In this lecture (The Capital Asset Pricing Model) we seek to obtainsome insight on stocks expected returns. How are expected returns determined? How are they related to risk?2 / 29Overview of the LectureInvestmentTheoryElenaPikulinaOverviewFromPortfolioTheory tothe CAPMCAPM: Assumptionsand Implications1From Portfolio Theory to the CAPM2CAPM: Assumptions and Implications3The CAPM Equation4SML and CMLThe CAPMEquation5Beta and AlphaSML andCML6Applications of the CAPM7Alternative Models to the CAPM8Statistical Tests of the CAPMBeta andAlpha3 / 29From Portfolio Theory to an Equilibrium ModelInvestmentTheoryElenaPikulinaOverviewFromPortfolioTheory tothe CAPMCAPM: Assumptionsand Implications Portfolio Theory Optimal individual behavior (portfolio optimization) when r

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