Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Лекц 15 Capital asset pricing model (capm)

615 views

Published on

Лекц 15 Capital asset pricing model (capm)

Published in: Economy & Finance
  • Be the first to comment

  • Be the first to like this

Лекц 15 Capital asset pricing model (capm)

  1. 1. Capital Asset Pricing Model (CAPM)
  2. 2. Risk of an Individual Security in a Market Portfolio  Researchers have shown that the best measure of the risk of a security in a large portfolio is the beta (β) of the security  Beta measures the responsiveness of a security to movements in the market portfolio  Higher the beta, higher the responsiveness, higher the uncertainty, and higher the risk  Beta measures the risk of the security
  3. 3. Security Return % Estimating β with regression te r ac r ha C ti c is ine L Slope = β i Return on market % Ri = α i + β iRm + ei
  4. 4. The Formula for Beta Cov ( Ri , RM ) βi = 2 σ ( RM ) Clearly, the estimate of beta will depend upon the choice of a proxy for the market portfolio.
  5. 5. Relationship between Risk and Expected Return (CAPM) Expected Return on the Market: R M = RF + Market Risk Premium Expected return on an individual security: R i = RF + β i × ( R M − RF ) Market Risk Premium This applies to individual securities held within well diversified portfolios.
  6. 6. Expected Return on an Individual Security  This formula is called the Capital Asset Pricing Model (CAPM) Ri = RF +βi ×( RM − RF ) Expected return on a security RiskBeta of the = + × free rate security Market risk premium • Assume βi = 0, then the expected return is RF. • Assume βi = 1, then Ri = RM
  7. 7. Expected return Relationship between Beta and Expected Return Ri = RF +βi ×( RM − RF ) RM RF 1.0 β
  8. 8. Expected return Relationship Between Beta and Expected Return (contd.) 13.5% 3% β i = 1. 5 RF = 3% 1.5 β RM =10% R i = 3% + 1.5 × (10% − 3%) = 13.5%

×