Capital Asset Pricing Model: Applications
Estimate of Expected Return
Capital Asset Pricing Model: Assumptions and the Security Market Line
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
Calculation and Interpretation of 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…
Return Generating Models
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 and Nonsystematic Risk
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…
Capital Market Theory: CML – Leveraged Portfolios
Leveraged Portfolios with Different Lending and Borrowing Rates
Capital Market Theory: The Capital Market Line
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.
Capital Market Theory: Risk-Free and Risky Assets
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…