BKM 9: CAPM Flashcards
Mutual fund theorem
Passive strategy of investing in a market-index portfolio is efficient
Attempts to beat it incur costs with no offsetting benefit
Risk premium on market portfolio
Aσ2M
Market price of risk
CAPM Equation
CAPM predicts __________________
returns on investments in the securities of the firm
Security Market Line (SML)
Relationship between beta and expected return; all securities must lie on SML in market equilibrium
Key implications of CAPM
- Market portfolio is efficient
- Risk premium is proportional to beta
Individual behavior assumptions of CAPM
Investors are rational, mean-variance optimizers
Planning horizon is a single period
Identical input lists
Market structure assumtions of CAPM
All assets are publicly held or traded, short positions allowed, and common risk free rate
All information is publicly available
No taxes
No transaction costs
Challenges of CAPM
Liability of short position unlimited
Limited supply of shares of stock
Prohibition of short sales
Efficient frontier portfolio characteristics
- Any portfolio that is a combination of frontier portfolios is also on the frontier
- Every portfolio on efficient frontier has a companion portfolio with which is is uncorrelated (called zero-beta)
Zero-beta portfolio
Results when investors face restrictions on borrowing
Two assets that are not traded
Human capital
Privately held businesses
SML equation for human capital
ICAPM
CCAPM
