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Part 1, Topic 1: Elton, Chapter 13: The Standard Capital Asset Pricing Model.

Smerchant

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This learning spreadsheet covers the concepts in Part 1, Topic 1: Elton, Chapter 13: The Standard Capital Asset Pricing Model. This spreadsheet used to have the CML and SML tabs? What happened to them? Can you please assist. I am trying to look on my computer for the older version that includes it.
 

Nicole Seaman

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#2
This learning spreadsheet covers the concepts in Part 1, Topic 1: Elton, Chapter 13: The Standard Capital Asset Pricing Model. This spreadsheet used to have the CML and SML tabs? What happened to them? Can you please assist. I am trying to look on my computer for the older version that includes it.
Hello @Smerchant

I just downloaded the spreadsheet from the study planner and it is showing the CML and SML tabs.

Elton XLS.png
 

JamesVU2000

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#3
While the riskfree rate is 1.0% and the market index (e.g., S&P 1500) has an expected return of 9.0% with volatility of 20.0%, a portfolio with covariance (to the market index) of 0.030 returns 10.0%. According to the capital asset pricing model (CAPM), what is the portfolio’s alpha?

  • -2.0%
  • zero, the portfolio lies on the SML
  • +1.0%
  • +3.0%
Incorrect
alpha = portfolio return – (riskfree_rate + beta*market_excess_return). Because beta =0.030/20%^2 = 0.750, alpha = 10.0% – (1% + 0.750*8.0%) = 3.0%. This question employs at least two foundation ideas that require mastery:

  • CAPM is natively an ex ante formula, it gives the expected return as Rf + beta *market_excess_return. Ex post deviation is called alpha, which is the vertical distance from the security market line (SML) which plots CAPM.
  • Beta is covariance (i, M)/variance(M) or, equivalently, correlation (i, M)/volatility(M).


could you please add the step for the .9-.1 = .8 for clarity ?
 

Nicole Seaman

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#7
Hi @JamesVU2000 (cc @Nicole Seaman this looks like quiz version of 409.3 @ https://www.bionicturtle.com/forum/...-responsibilities-levered-beta-and-capm.7902/ )

You just mean you'd like to see something like "8.0% is the market's excess return" as a helper step? I agree that's a fine helper, but I don't feel like it's necessary, as we can all be expected to know CAPM ...
@David Harper CFA FRM

I'm not sure exactly what I'm supposed to be adding to the quiz. I see that he clarified what he meant, but I want to make sure that I understand why I was tagged (it usually means I need to fix something) ;)
 

David Harper CFA FRM

David Harper CFA FRM
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#8
Sorry @Nicole Seaman I originally referenced you only because James did not indicate the source Question, so I wanted to make you aware it was 409.3. With respect to edit/correction: there is no correction to be made. Rather, he made a suggestion I have noted but nothing to change currently. Thanks,
 
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