Liquidity effect - PowerPoint PPT Presentation

Chapter 3 behavior of interest rate

Chapter 3 behavior of interest rate. Ⅰdeterminants of asset demand. 1. determinants of asset demand (1)wealth total resources owned by individual, including all assets (2)expected return the return expected over the next period on one asset relative to alternative assets. (3)Risk

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CAPM Recap

CAPM Recap. The expected return on an asset is written as E(r i ) = R f + Beta i [E(r m ) – R f ] Beta = Cov (R i , R m ) / Var (R m ) The market is mean-variance efficient An asset’s expected return is related to its level of systematic or non-diversifiable risk as represented by Beta

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