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Recap of CAPM

Recap of CAPM. CAPM: Definition of Beta. Assume: r i (t ) = beta i * r m (t ) + alpha i Use linear regression (line fitting) to find beta and alpha. Beta & Correlation with the Market. Online example. Beta and Correlation are Different!.

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Recap of CAPM

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  1. Recap of CAPM

  2. CAPM: Definition of Beta • Assume: • ri(t) = betai * rm(t) + alphai • Use linear regression (line fitting) to find beta and alpha.

  3. Beta & Correlation with the Market • Online example

  4. Beta and Correlation are Different!

  5. Beta & Correlation with Market

  6. CAPM: Expected Residual = 0 • CAPM: • ri(t) = betai * rm(t) + alphai • ri(t) = betai * rm(t) + random • Active Portfolio Management View • ri(t) = betai * rm(t) + alphai

  7. CAPM: Implications • Expected excess returns are proportional to beta. • Beta of a portfolio = weighted sum of betas of components.

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