week 5

Question 1

CAPM Extensions - Zero-Beta CAPM

CAPM equation results

Answer 1

the CAPM equation results when investors face restrictions on borrowing

Question 2

CAPM Extensions - Zero-beta CAPM

The equation results when investors are subject to borrowing extensions

Answer 2

• Investors who would otherwise want to lever their portfolios but cannot will increase (decrease) their weight in high beta (low beta) stocks;
• As a result, prices of high beta stocks will rise, causing their risk premiums to fall; and,
• As a result, the SML will be flatter than that of the simple CAPM.

Question 3

Zero-beta model

characteristics of efficient frontier portfolios

Answer 3

1. Any portfoio that is a combo of 2 frontier portfolios is itself on the efficient frontier i.e. a portfolio made up of efficient portfolios is itself efficient
2. Every portfolio on the efficient frontier, except the global minimum-variance portfolio, has a companion , zero-beta portfolio on the bottom (inefficient) half of the frontier with which it is uncorrelated

Question 4

CAPM Extensions - Labour Income and Non Traded Assets