CAPM Flashcards
1
Q
CAPM Assumptions 6
A
1) Price taking; 2) Complete markets; 3) Risk free; 4) No taxes or transaction costs; 5) mean variance optimizers; 6) Same expectations
2
Q
Capital market line
A
connects risk free to tangency
3
Q
FOC of CAPM (also what is theta)?
A
\theta = alpha^-1 \Sigma^-1 (mu-q/q_f)
where q_f is price of risk free and mu is expected payoff
theta is number of shares (not excess returns)
4
Q
Rewrite CAPM allocations as a function of market
A
Theta = a_bar / a_i * m
5
Q
CAPM regression
A
E[R_a]-R_f = \beta_am(E[R_m]-R_f)
6
Q
Roll Critique
A
Can never observe true market
