Assumptions of the CAPM The Security Market Line The security market line (SML) is a graphical representation of the capital asset pricing model with beta, reflecting systematic risk, on the x-axis and expected return on the y-axis. Portfolio Beta
beta is a measure of how sensitive an asset’s return is to the market as a whole and is calculated as the covariance of the return on i and the return on the market divided by the variance of the market return; that expression is equivalent to the product of the asset’s correlation with the market with a…
A return-generating model is a model that can provide an estimate of the expected return of a security given certain parameters. A multi-factor model allows more than one variable to be considered in estimating returns and can be built using different kinds of factors, such as macroeconomic, fundamental, and statistical factors. Three-Factor and Four-Factor Models The Single-Index Model Decomposition…
Systematic risk is risk that cannot be avoided and is inherent in the overall market. It is non-diversifiable because it includes risk factors that are innate within the market and affect the market as a whole. Nonsystematic risk is risk that is local or limited to a particular asset or industry that need not affect assets outside…
Leveraged Portfolios with Different Lending and Borrowing Rates
Passive and Active Portfolios What Is the “Market”? The Capital Market Line (CML) The capital market line is a special case of the capital allocation line, where the risky portfolio is the market portfolio.
Portfolio of Risk-Free and Risky Assets An investor’s portfolio improves if a risk-free asset is added to the mix. In other words, a combination of the risk-free asset and a risky asset can result in a better risk–return trade-off than an investment in only one type of asset because the risk-free asset has zero correlation…
Zipline and PyFolio abstract away the complexities of the backtesting and performance/risk analysis aspects of algorithmic trading strategies. Backtesting should include all relevant factors, such as slippage and trading costs. Zipline is one of the most advanced open source Python libraries for algorithmic trading backtesting engines. PyFolio is an open-source Python performance and risk analysis…
Exploring the yahoofinancials Python library The yahoofinancials Python library provides free access to the market data available from Yahoo Finance, whose provider is ICE Data Services. It provides access to historical and, for most assets, also real-time pricing data for the following: Single-ticker retrieval Convert the nested JSON to a pandas’ DataFrame Real-time data retrieval…
