CAOT 31 Lecture Notes - Lecture 34: Capital Asset Pricing Model, Efficient Frontier, Weighted Arithmetic Mean
30 Oct 2020
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Chapter 7: capital asset pricing and arbitrage pricing theory. The capm provides a precise prediction of the relationship we would observe between the risk of an asset and its expected return. 1. ) provides a benchmark rate of return for evaluating possible investments. 2. ) helps us make an educated guess as to the expected return on assets that have not yet been traded in the market place. Was developed by treynor, sharpe, lintner and mossin in the 1960s. A model that relates the required rate of return on a security to its systematic risk as measured by beta. Markets for securities are perfectly competitive and equally profitable to all investors. Investors are alike in every way except for initial wealth and risk aversion, they all choose investment portfolios in the same manner (homogeneous expectations) 1. ) all investors will choose to hold the market portfolio (m), which include alle assets of the security universe.
