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

Smerchant

New Member
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

Director of FRM Operations
Staff member
Subscriber
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
 
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

Director of FRM Operations
Staff member
Subscriber
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
Staff member
Subscriber
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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