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    Capital Asset Pricing Model - CAPM

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    singhsdh

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    Capital Asset Pricing Model - CAPM

    Uploaded by

    singhsdh
    14 views7 pages

    Original Title

    Capital Asset Pricing Model _CAPM

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    Copyright:

    Attribution Non-Commercial (BY-NC)
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    Download as ppt, pdf, or txt
    14 views7 pages

    Capital Asset Pricing Model - CAPM

    Uploaded by

    singhsdh

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 7

    Risk, Return, and the Capital Asset Pricing Model

    John Marron

    RISK
    Total Risk = Systematic + Unsystematic Risk
    Systematic Risk is also called Nondiversifiable Risk or Market Risk Unsystematic Risk is also called Diversifiable Risk or Unique Risk

    Diversification
    Can eliminate some risk Unsystematic risk tends to disappear in a large portfolio Systematic risk never disappears

    Beta
    Beta = How much systematic risk a particular asset has relative to an average asset For example:
    XOM: 0.65 VIAB: 1.22 YHOO: 3.56 MII Portfolio: 1.54

    Capital Asset Pricing Model

    Er = Rf + B{E(Rm)-Rf}
    Works for both individual assets and portfolios

    McIntire Investment Institute


    Example: If Rf = 5.5% Market Risk Premium = 7% Then the MII should return: Er = 5.5% + 1.54(12.5%-5.5%) Er = 16.28%

    Expected Return depends on 3 things


    The time value of money (risk-free rate, Rf) The reward for bearing systematic risk (market risk premium={E(Rm) - Rf} The amount of systematic risk (Beta)

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