The Capital Asset Pricing Model.ppt

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1、CHAPTER 9,The Capital Asset Pricing Model,9-2,It is the equilibrium model that underlies all modern financial theoryDerived using principles of diversification with simplified assumptionsMarkowitz, Sharpe, Lintner and Mossin are researchers credited with its development,Capital Asset Pricing Model (

2、CAPM),9-3,Assumptions,Individual investors are price takersSingle-period investment horizonInvestments are limited to traded financial assetsNo taxes and transaction costs,Information is costless and available to all investorsInvestors are rational mean-variance optimizersThere are homogeneous expec

3、tations,9-4,All investors will hold the same portfolio for risky assets market portfolioMarket portfolio contains all securities and the proportion of each security is its market value as a percentage of total market value,Resulting Equilibrium Conditions,9-5,Risk premium on the market depends on th

4、e average risk aversion of all market participantsRisk premium on an individual security is a function of its covariance with the market,Resulting Equilibrium Conditions,9-6,Figure 9.1 The Efficient Frontier and the Capital Market Line,9-7,Market Risk Premium,The risk premium on the market portfolio

5、 will be proportional to its risk and the degree of risk aversion of the investor:,9-8,The risk premium on individual securities is a function of the individual securitys contribution to the risk of the market portfolio.An individual securitys risk premium is a function of the covariance of returns

6、with the assets that make up the market portfolio.,Return and Risk For Individual Securities,9-9,GE Example,Covariance of GE return with the market portfolio:Therefore, the reward-to-risk ratio for investments in GE would be:,9-10,GE Example,Reward-to-risk ratio for investment in market portfolio:Re

7、ward-to-risk ratios of GE and the market portfolio should be equal:,9-11,GE Example,The risk premium for GE:Restating, we obtain:,9-12,Expected Return-Beta Relationship,CAPM holds for the overall portfolio because:This also holds for the market portfolio:,9-13,Figure 9.2 The Security Market Line,9-1

8、4,Figure 9.3 The SML and a Positive-Alpha Stock,9-15,The Index Model and Realized Returns,To move from expected to realized returns, use the index model in excess return form:The index model beta coefficient is the same as the beta of the CAPM expected return-beta relationship.,9-16,Figure 9.4 Estim

9、ates of Individual Mutual Fund Alphas, 1972-1991,9-17,Is the CAPM Practical?,CAPM is the best model to explain returns on risky assets. This means:Without security analysis, is assumed to be zero.Positive and negative alphas are revealed only by superior security analysis.,9-18,Is the CAPM Practical

10、?,We must use a proxy for the market portfolio. CAPM is still considered the best available description of security pricing and is widely accepted.,9-19,Econometrics and the Expected Return-Beta Relationship,Statistical bias is easily introduced.Miller and Scholes paper demonstrated how econometric

11、problems could lead one to reject the CAPM even if it were perfectly valid.,9-20,Extensions of the CAPM,Zero-Beta ModelHelps to explain positive alphas on low beta stocks and negative alphas on high beta stocksConsideration of labor income and non-traded assets,9-21,Extensions of the CAPM,Mertons Mu

12、ltiperiod Model and hedge portfoliosIncorporation of the effects of changes in the real rate of interest and inflation,Consumption-based CAPMRubinstein, Lucas, and BreedenInvestors allocate wealth between consumption today and investment for the future,9-22,Liquidity and the CAPM,Liquidity: The ease

13、 and speed with which an asset can be sold at fair market valueIlliquidity Premium: Discount from fair market value the seller must accept to obtain a quick sale. Measured partly by bid-asked spreadAs trading costs are higher, the illiquidity discount will be greater.,9-23,Figure 9.5 The Relationship Between Illiquidity and Average Returns,9-24,Liquidity Risk,In a financial crisis, liquidity can unexpectedly dry up.When liquidity in one stock decreases, it tends to decrease in other stocks at the same time.Investors demand compensation for liquidity riskLiquidity betas,