FIN 303 Study Guide - Midterm Guide: Risk-Free Interest Rate, Capital Asset Pricing Model, S&P 500 Index
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10 May 2017
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Investors are mean variance optimizers (best point to be along the efficient frontier) If assumptions are true: everyone holds risky portfolio m and some of the risk free asset, expected return: Deviation of risky portfolio and risk free asset. In a completely diversified portfolio, only risk associated with m should matter (i. e. covariance with m: cml compensates based on the std. deviation of a well-diversified portfolio . Capm says you are only rewarded for systematic risk even if you are not well diversified. Brinson gsmi: all will yield different results. Tests of the capm: estimate the security characteristic line. Problems with the test (garbage in garbage out: stocks were very volatile, decreased precision of the tests, did(cid:374)"t use (cid:373)arket portfolio, used a proxy (s&p 500, esti(cid:373)ated beta is(cid:374)"t the (cid:862)true(cid:863) (cid:271)eta due to sa(cid:373)pli(cid:374)g error. Investors cannot borrow at the risk free rate.
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7.37%. 11.05%. 8.32%. |
It ignores cash flows occurring after the payback period. It ignores the time value of money, that is, dollars received in different years are all given the same weight. |
1.82. 2.00. 1.94 |
undervalued. overvalued. |
13.92%. 16.34%. 12.17%. |
$221.86. $195.23. $257.35. |
10.82%. 11.76%. 9.64%. |
10 years. 4.58 years. 6.12 years. |
12.04%. 14.93%. 9.15%. |
1.24 years. 1.62 years. 1.15 years.
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