Chapter 9 part 2 CAPm

Question 1

what is capital asset pricing model (CAPM_

Answer 1

a pricing model that uses one factor, market risk, to relate expected returns to risk

Question 2

The development of CAPM was based on what assumptions

Answer 2

1. all investors have identical expectations about expected returns, SD. and correlation coefficients for all securities
2. all investors have the same one-period time horizon
3. al investors can borrow or lend money at the risk-free rate of return
4. there are no transaction costs
5. there are no personal income taxes, so investors are indifferent whether they receive capital gains or dividends
6. there are many investors, and no single investor can affect the price of a stock through his or her buying and selling decisions. therefore, invvestors are price-takers
7. capital markets are in equilibirium

Question 3

CML (Capital market line)

Answer 3

is a lien depicting the highest attainable expected return for any given risk level that includes only efficient portfolios; all rational, risk-averse investors want to be on this line

Question 4

Market price of risk

Answer 4

the incremental expected return divided by the incremental risk
- indicates the additional expected return that the market demands for an increase in risk

Question 5

required rate of return

Answer 5

the rate of return investors need to tempt them to invest in a security