5 views

Uploaded by nneiroukh2218

- The CML is a Line That is Used to Show the Rates of Return
- DCF approach to valuation.pdf
- Amiud, Mendelson, Pedersen - Liquidity and Asset Prices.pdf
- CAPM QnA
- Capm and APT (Rohit)
- An Analysis of Intertemporal and Cross-sectional Determinants of Earnings Response Coefficients
- Intro to Portfolio Management
- Capital Asset Pricing Model
- Fin 639 Project- Square Pharma
- SAPM
- 8 Format. Man-A Study on Capital Asset Pricing Model With Reference to BSE
- 1366455886_6449a064eaac7193447b4559c2a6ea70
- Week6 Assignment Answer
- Manajemen Investasi Pertemuan 5
- Assignment3 a Partial Solution
- Lesson 03
- Syllabus 5161 Master
- risk return new.docx
- 12853150 Comparative Analysis of Mutual Funds 110904134713 Phpapp02
- bf87d05458778045e92103fb9d294a8c21f2

You are on page 1of 51

I. Portfolio Theory

group of assets? assume: investors are risk averse additional compensation for risk tradeoff between risk and expected return

goal

for a given risk, maximize exp. return OR for a given exp. return, minimize the risk

tools

Measuring Return

change in asset value + income

return = R = initial value

R is ex post

example 1

Tbill, 1 month holding period buy for $9488, sell for $9528 1 month R:

9528 - 9488 9488 = .0042 = .42%

annualized R:

(1.0042)12 - 1 = .052 = 5.2%

example 2

100 shares IBM, 9 months buy for $62, sell for $101.50 $.80 dividends 9 month R:

101.50 - 62 + .80 62 = .65 =65%

annualized R:

(1.65)12/9 - 1 = .95 = 95%

Expected Return

E(R) = SUM(Ri x Prob(Ri))

example 1

R 10% 5% -5% Prob(R) .2 .4 .4

= 2%

example 2

R 1% 2% 3% Prob(R) .3 .4 .3

= 2%

examples 1 & 2

returns in example 1 are more variable

Risk

how much will R vary from E(R) how likely is actual R to vary from E(R) measured by variance (s2) standard deviation (s)

s = SQRT(s2)

example 1

s2 =

(.2)(10%-2%)2 + (.4)(5%-2%)2

+ (.4)(-5%-2%)2

= .0039 s = 6.24%

example 2

s2 =

(.3)(1%-2%)2 + (.4)(2%-2%)2

+ (.3)(3%-2%)2

= .00006 s = .77%

preferred by risk averse investors variance works best with symmetric distributions

prob(R)

prob(R)

E(R)

E(R)

symmetric

asymmetric

Diversification

holding a group of assets lower risk w/out lowering E(R)

Why?

individual assets do not have same return pattern combining assets reduces overall return variation

unsystematic risk

specific to a firm can be eliminated through diversification examples: -- Safeway and a strike -- Microsoft and antitrust cases

systematic risk

market risk cannot be eliminated through diversification due to factors affecting all assets -- energy prices, interest rates, inflation, business cycles

example

reduce risk by 40-50%

then s is not the best measure of risk is an absolute measure of risk need a measure just for the systematic component

Beta, b

relative to return of market portfolio mkt. portfolio = mkt. index -- S&P 500 or NYSE index

% change in asset return b= % change in market return

interpreting b if b = 0

asset is risk free if b = 1 asset return = market return if b > 1 asset is riskier than market index b<1 asset is less risky than market index

Sample betas

Amazon Anheuser Busch Microsoft Ford General Electric Wal Mart 2.23 -.107 1.62 1.31 1.10 .80

measuring b

estimated by regression

data on returns of assets data on returns of market index estimate

R = bR m

problems

weekly? monthly? annually? choice of market index? NYSE, S&P 500 survivor bias

5 years? 50 years? time period? 1970-1980? 1990-2000?

CAPM

Capital Asset Pricing Model 1964, Sharpe, Linter quantifies the risk/return tradeoff

assume

asset no transactions costs, taxes same expectations, time horizon risk averse investors

implication

beta risk free return market return

E( R ) = R f b[ E( R m ) R f ]

or

E( R ) R f = b[ E( R m ) R f ]

where

E( R m ) R f

so if b >1,

E( R ) R f

>

E( R m ) R f

E( R )

> E( R m )

so if b <1,

E( R ) R f

<

E( R m ) R f

E( R )

< E( R m )

exp. market return less risky portfolio has smaller exp. return

so if b =1,

E( R ) R f

E( R m ) R f

E( R )

= E( R m )

exp. market return equal risk portfolio means equal exp. return

so if b = 0,

E( R ) R f

=0 =

Rf

E( R )

free return

example

E( R ) = R f b[ E( R m ) R f ]

tradeoff CAPM tells use the price of risk

return under CAPM > actual return relationship between and return? some studies it is positive some recent studies argue no relationship (1992 Fama & French)

determining returns January effect firm size effect day-of-the-week effect ratio of book value to market value

CAPM not testable do not observe E(R), only R do not observe true Rm do not observe true Rf results are sensitive to the sample period

APT

several factors affect E(R) does not specify factors

implications

E(R) is a function of several factors, F each with its own b

many factors unspecified factors CAPM is a special case of the APT 1 factor factor is market risk premium

how many factors? what are the factors? 1980 Chen, Roll, and Ross

industrial production inflation yield curve slope other yield spreads

summary

how to measure risk? how to price risk? neither CAPM or APT are perfect or free of testing problems both have shown value in asset pricing

- The CML is a Line That is Used to Show the Rates of ReturnUploaded byHooria Khan
- DCF approach to valuation.pdfUploaded byLucky Lucky
- Amiud, Mendelson, Pedersen - Liquidity and Asset Prices.pdfUploaded bykhrysttalexa3146
- CAPM QnAUploaded byTaqsim E Rabbani
- Capm and APT (Rohit)Uploaded byagrawalrohit_228384
- An Analysis of Intertemporal and Cross-sectional Determinants of Earnings Response CoefficientsUploaded bykikounette
- Intro to Portfolio ManagementUploaded byAsad Mazhar
- Capital Asset Pricing ModelUploaded byPushkar Dhongde
- Fin 639 Project- Square PharmaUploaded byPushpa Barua
- SAPMUploaded byGuruKPO
- 8 Format. Man-A Study on Capital Asset Pricing Model With Reference to BSEUploaded byImpact Journals
- 1366455886_6449a064eaac7193447b4559c2a6ea70Uploaded byAlex Huesing
- Week6 Assignment AnswerUploaded byJia Nuo Zhang
- Manajemen Investasi Pertemuan 5Uploaded byfitria mulyawati p
- Assignment3 a Partial SolutionUploaded byThi Ntd
- Lesson 03Uploaded bymavericksailor
- Syllabus 5161 MasterUploaded bynikhilkop
- risk return new.docxUploaded byAishu Udutha
- 12853150 Comparative Analysis of Mutual Funds 110904134713 Phpapp02Uploaded byMonish Shrestha
- bf87d05458778045e92103fb9d294a8c21f2Uploaded byThomas Flanagan
- Stock Return Risk and Asset PricingUploaded byZain Ul Abidin
- Egp Mba AssignmentUploaded byAlvin Gee Kin Yuen
- Monthly Report 201512E-JPYUploaded bygannwong
- ACTPORT.PPTUploaded byParin Maru
- Capm ModelUploaded byBittoo Singh
- Market Depth and Risk Return Analysis of Dhaka Stock Exchange: An Empirical Test of Market EfficiencyUploaded byMd. Mahmudul Alam
- CT@2paper1Uploaded byRewa Shankar
- FIN700 - FORMULAE SHEET - Final Exam (and any DEFERRED EXAM) - Trimester 0318.docxUploaded byMahbub Zaman Ashrafi
- . Analysis of Select Fmcg Companies’ Stock Performance With Market (2)Uploaded byHenston Danthy
- Credit Risk ManagementUploaded bykijiba

- Boeschoten-S-Reliability&Accuracyof Estimates.PDFUploaded byegglestona
- MTGRSQAPUploaded byravi0712120924
- BOI Handbook 2011Uploaded byMainul Izlam
- ORGANISATIONAL EFFECTIVENESSUploaded byMBA DEPT
- hibernatebylnraoUploaded byJyothiPrakashReddyS
- DemoniUploaded byKush Patel
- Kapatiran Sa Meat and Canning DivisionUploaded byRic Andrads
- Free Look CancellationUploaded bykataria4u
- turkeyyyUploaded byAnil Akhter
- Human Resource Management.docxUploaded bySangh Dev
- Wipro Analytical Paper 1 2012Uploaded bypravin kumar reddy
- Business Contunity PlanUploaded byChris Johnson
- Memograph - Metherology dept.pdfUploaded byMemograph
- BIM PresentationUploaded bySteven McKay
- RIN Case SolutionUploaded byRuchika Sinha
- Cover PageUploaded byAbhishek Tulsyan
- US Army: 715-1Uploaded byArmy
- Final Project.Uploaded byUrvi Patel
- Cs EmbraerUploaded byapi-3757629
- 201108-200-ITIL-v3-questionsUploaded byMadnug Se
- Treasury Management AssignmentUploaded byJed Bentillo
- Case Study SCMUploaded byroshan64air
- Solved MCQs of AccountingUploaded byAnum Saleem
- GE Hca15 IM CH22 StudentUploaded byKa Io Chao
- MANAPPURAM DIAMOND GOLDUploaded byRaghu.G
- Max Job Agile MasterUploaded bygreatsun0
- Augat v. AegisUploaded bygesmer
- Accounting Information Systems 7th Edition by Hall Test BankUploaded bylidncon
- IB case Study 2013 termsUploaded byDayang Syahirah Abang Suhardi
- MGI the Social Economy Full ReportUploaded bypdfal