CAPM Flashcards
What does CAPM stand for
Capital Asset Pricing Model
what does correlation measure
how two shares move in relation to each other
what does a correlation of 1 mean
they move together
what does a correlation of 0 mean
they have no relationship
what does a correlation of -1 mean
they move in opposite directions
is high or low correlation better for reducting portfolio risk
low
are more or less shares included in the portfolio more risky
less is more risky
what does the dregree of risk reduction depend on
correlation between the shares
number of shares included in the portfolio
can diversification eliminate all risk
no
what is the key point of the CAPM
only the non diversifiable portion of risk is rewarded
you can get rid of unique risk from diversification, so why should you be rewarded for taking on risk that can be elimated
what is the beta in the CAPM
return on market in excess of risk free rate
how changes in the makret effect the individual interest rate
what is the market risk premoium
market return - risk free rate
what are the components of the CAPM
Return on risk free asset
Beta
Return on market portfolio
Market risk premium
what does the return on market premium usually depend on
country rhat the asset is traded in
benchmark usually used
if beta = 1 what does this mean
average risk
if beta> 1 what does this mean
above average risk
if beta is < 1 what does this mean
below average risk
if beta =0 what does this mean
risk free
what is the average beta across all equity investments
1
where is beta usually listed
along with share price
what data is used to calculate beta
past history
how much depends on how much is relevant to firm going forward
are high beta shares expected to give a higher average return than low beta shares
yes
why are higher beta shares expcted to give higher returns
more risky
what does it mean to say that the CAPM is an equilibrium realtionship
it is possilbe to have a high beta share that yields a lower return than a low beta share in a period
