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Lecture

Capital Asset Pricing Model

In course

FIN-405: Investments

The course covers a wide range of topics in investment analysis ...

Description

This lecture covers the Capital Asset Pricing Model (CAPM) assumptions, the market portfolio, equilibrium market clearing, the Capital Market Line, the Security Market Line, and the Security Characteristic Line. It also discusses estimating betas, the Vasicek shrinkage estimator, and the implications of short-sale constraints on the CAPM equilibrium. The lecture explores the Zero-Beta CAPM, leverage CAPM, liquidity CAPM, and the impact of exogenous transaction costs, private information, and liquidity risk on asset pricing.

Instructor

Pierre Collin-Dufresne

Official source

Ontological neighbourhood

Economics

Microeconomics: Financial economics

Related concepts (32)

Capital asset pricing model

In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.

Modern portfolio theory

Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversification in investing, the idea that owning different kinds of financial assets is less risky than owning only one type. Its key insight is that an asset's risk and return should not be assessed by itself, but by how it contributes to a portfolio's overall risk and return.

Beta (finance)

In finance, the beta (β or market beta or beta coefficient) is a statistic that measures the expected increase or decrease of an individual stock price in proportion to movements of the Stock market as a whole. Beta can be used to indicate the contribution of an individual asset to the market risk of a portfolio when it is added in small quantity. It is referred to as an asset's non-diversifiable risk, systematic risk, or market risk. Beta is not a measure of idiosyncratic risk.

Arbitrage pricing theory

In finance, arbitrage pricing theory (APT) is a multi-factor model for asset pricing which relates various macro-economic (systematic) risk variables to the pricing of financial assets. Proposed by economist Stephen Ross in 1976, it is widely believed to be an improved alternative to its predecessor, the Capital Asset Pricing Model (CAPM). APT is founded upon the law of one price, which suggests that within an equilibrium market, rational investors will implement arbitrage such that the equilibrium price is eventually realised.

Security market line

Security market line (SML) is the representation of the capital asset pricing model. It displays the expected rate of return of an individual security as a function of systematic, non-diversifiable risk. The risk of an individual risky security reflects the volatility of the return from security rather than the return of the market portfolio. The risk in these individual risky securities reflects the systematic risk. The Y-intercept of the SML is equal to the risk-free interest rate.

Related lectures (33)

Factor Models and CAPM

Covers the Capital Asset Pricing Model, estimating betas, empirical evidence on returns versus beta, short-sale constraints, and optimal portfolio choice.

Investments: Portfolio Selection and Asset Pricing

Covers portfolio selection, asset pricing, market efficiency, and risk management in investments.

Factor Models in Finance

Covers factor models, portfolio choice, anomalies, and mutual fund performance analysis.

Equilibrium State Prices Determination

Explains the determination of equilibrium state prices in asset pricing through consumption market clearing and budget constraints.

Asset Pricing Theory: Mean Variance Analysis