CAPM Flashcards
Sharpe ratio formula
Sp=(rp-rf)/Gp
What does Sharpe ration show?
Excess return over unit of TOTAL risk.
What does the Treynor measure show?
Excess return per unit of Systematic risk.
Treynor index
Tp=(rp-rm)/Bp
What does Modigliani 2 measure show?
Difference between returns if we adjust risk.
MM2 formulas
MM=ra-rm (clope CAL - slope CML)
MM=(ra-rf)*Gm/Ga - (rm-rf)
L>0
undervalued (above the SML line)
L<0
overvalued (Below the SML line)
Appraisal Ratio
AR=Li/G(ei)
what does AR show?
Excess return over diversifyable risk
R 2=…
R 2=p im 2
R 2 formula
R2 = (Bim2*Gm2)/Gi2
what does R2 mean?
R2 - proportion of a firm’s risk that is explained by the MARKET.
What is (1-R2)?
proportion of FIRM- specific risk.
Bim=…
Bim=Gim/Gm2
Sharpe of Optimal portfolio
Sp2=Sm2+ La2/G(ea)2
Link between Alpha and Sharpe
Sp 2=Sm 2+ La2/G(ea)2
Link between G(ea) and Sharpe
Sp 2=Sm 2+ La2/G(ea)2
T2
T2 = Tp- Tm = Lp / Bp
Link between L and Treynor
T2 = Tp- Tm = Lp / Bp
what is Skewness
A measure of symmetry, or more precisely, the lack of symmetry of distribution
Kurtosis
A measure of whether the data are peaked or flat relative to a normal
distribution
Kurtosis of Normal distrinution =
3
K>0 ->
K<0
K>0 peaked data
K<0 flat data
formula for 3 measures of risk
Gp 2 = (Bp * Gm) 2 + G (ea) 2
Gei/Gi
Gei/Gi = 1- (Ba*Gm)/Ga Gei/Gi = 1- Sa/Sm
What does Gei/Gi show?
Proportion of firm’s risk diversified away.
