Download - SML AND CML
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Contemporary Investments: Chapter 18
Chapter 18CAPITAL ASSET PRICING THEORY What is the capital market line (CML)?
How is the Capital Asset Pricing Model(CAPM) developed?
What is the difference between thestandard deviation risk and beta riskmeasures?
How can an investor apply the CAPM tosecurity analysis?
How do you estimate beta?
What are the good news and the bad news
about beta?
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Assumptions of the Capital
Asset Pricing Model Investors have homogeneous
expectations
Frictionless capital markets
Investors are rational and seek tomaximize their expected utility functions
Investment is for one-period only All investors can borrow or lend at the
riskfree rate
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Contemporary Investments: Chapter 18
Efficient frontier and the
optimal risky portfolio Developing the capital market line
(CML)
Introducing the riskfree asset.
The capital market line (CML) or theborrowing-lending line.
The Portfolio Separation Theorem
The market portfolio, M
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Figure 18.1 Efficient Frontier
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Figure 18.2 Efficient Frontier and UtilityCurves for Investors A and B
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Figure 18.3 Combinations of theRisk-Free Asset RF andRisky Portfolios P1 and P2
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Figure 18.4 Combinations of theRisk-Free Asset RF and
the Risky Portfolio M
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Figure 18.5 CML and Individual Utility Curves
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Figure 18.6 CML: The Borrowing-Lending Line
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Capital Asset Pricing Model
Developing a relative risk measure
Understanding beta
Systematic risk or market risk
Diversifiable risk or firm-specific risk
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Figure 18.7 CML and Individual Securities
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CAPM derivation
Security risk and return
Reward for investing in a security
Security risk
Securitys reward-to-risk ratio
Risk/return relationship
The security market line (SML)
Differences between the CML and SML
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Contemporary Investments: Chapter 18
Figure 18.8 Security Market Line (SML)
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CAPM and security analysis
Estimating the required return.
Estimating the predicted return.
Security analysis decision rule.
Comparison with fundamental
analysis.
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Contemporary Investments: Chapter 18
Estimating Beta
Security characteristic line
Information service beta estimates
Calculating beta: Separatingsystematic risk from diversifiable
risk. Differences between the SML and the
security characteristic line
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Good news and bad news
about Beta How reliable are beta estimates?
Does beta really measure risk?
The verdict on beta.
Implications for investors
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Figure 18.9 Security Market Line Analysis
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Contemporary Investments: Chapter 18
Figure 18.10 Regression Analysis toEstimate Beta