Learning objectives: Explain the arbitrage pricing theory (APT), describe its assumptions and compare the APT to the CAPM. Describe the inputs (including factor betas) to a multifactor model. Calculate the expected return of an asset using a single-factor and a multifactor model. Explain models...
Learning objectives: Explain modern portfolio theory and interpret the Markowitz efficient frontier. Understand the derivation and components of the CAPM. Describe the assumptions underlying the CAPM. Interpret the capital market line. Apply the CAPM in calculating the expected return on an...
why is correlation included to solve the problem? I cant see anything in the notes when we multiply the two terms x correlation?
Beta (i,M) = covariance(i, M)/variance(M) = 24%*15%*0.70/15%^2 = 1.12 <<- must know all of these steps! CAPM: E[R(i)] = Rf + Beta (i,M)*[R(M) - Rf] = 3% +...
The CAPM is a ex-ante single-factor model where the single-factor is the market's excess return: it says that we should expect an excess return that is proportional to the stock's beta, which is the stock's exposure to market's excess return, as measured by the stock's beta. Beta can be...
Learning objectives: Provide examples of factors that impact asset prices, and explain the theory of factor risk premiums. Describe the capital asset pricing model (CAPM) including its assumptions, and explain how factor risk is addressed in the CAPM. Explain implications of using the CAPM to...
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