Understanding Risk and Return with CAPM

Jun 30, 2025

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Explore the relationship between risk and return according to the Capital Asset Pricing Model (CAPM) in this informative guide. Learn how to calculate expected returns and manage portfolio risks effectively.

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Understanding Risk and Return with CAPM

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Presentation Transcript

The Capital Asset Pricing Model

The Capital Asset Pricing Model. The Risk Return Relation Formalized. Summary. E(r) = r f + .  = amount of risk  premium per unit risk. Define the market portfolio as having one unit of risk, Var(r m ) = 1 unit of risk. Risk premium per unit of risk is then E(r m ) – r f .

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The Capital Asset Pricing Model

The Capital Asset Pricing Model. Lecture XXIV. .Literature. Most of today’s materials comes from Eugene F. Fama and Merton H. Miller The Theory of Finance (Hinsdale, Illinois: Dryden Press, 1972) Chapter 7. The primary literature is:

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Ch 11 Return and Risk: The Capital Asset Pricing Model CAPM

Main Idea. What is an appropriate measure of risk?If you hold single asset, standard deviation of the asset is a good measure of the risk.If you hold a widely diversified portfolio, the beta of the asset is a good measure of the risk of the asset.Average return of the asset is a good measure of t

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Risk, Return, the Capital Asset Pricing Model

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The Capital Asset Pricing Model

The Capital Asset Pricing Model. The Risk Return Relation Formalized. Summary. As we discussed, the “market” pays investors for two services they provide: (1) surrendering their capital and forgoing current consumption and (2) sharing in the total risk of the economy.

548 views • 39 slides

The Capital Asset Pricing Model

The Capital Asset Pricing Model. The Risk Return Relation Formalized. Summary. As we discussed, the “market” pays investors for two services they provide: (1) surrendering their capital and so forgoing current consumption and (2) sharing in the total risk of the economy.

598 views • 37 slides

The Capital Asset Pricing Model

The Capital Asset Pricing Model. P.V. Viswanath For a First Course in INvestments. Learning Goals. What are the assumptions of the CAPM? What are the implications of the CAPM? What happens if we relax the assumptions of the CAPM? Is the CAPM testable in principle?

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Capital Asset Pricing Model

Capital Asset Pricing Model. Introduction. Asset Pricing – how assets are priced? Equilibrium concept Portfolio Theory – ANY individual investor’s optimal selection of portfolio ( partial equilibrium )

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Capital Asset Pricing Model

Steve Paulone Facilitator. Capital Asset Pricing Model. Standard Deviation in Risk Measurement.

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Capital Asset Pricing Model

Capital Asset Pricing Model. BKM: Chapter 7. Optimal Portfolios. Given current expected returns, standard deviations, and correlations: Choose risky portfolio to maximize Sharpe ratio. Tailor the risk by investing (long or short) in the risk-free asset.

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The Capital Asset Pricing Model

The Capital Asset Pricing Model. Review. Review of portfolio diversification Capital Asset Pricing Model Capital Market Line (CML) Security Market Line (SML). Capital Asset Pricing Model (CAPM). It is the equilibrium model that underlies all modern financial theory.

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Risk, Return, and the Capital Asset Pricing Model

Risk, Return, and the Capital Asset Pricing Model. Chapter 7. Expected Returns. Decisions must be based on expected returns. Methods used to estimate expected return. Historical approach. Probabilistic approach. Risk-based approach. Expected Returns: The Historical Approach.

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Capital Asset Pricing Model

Capital Asset Pricing Model. CAPM Security Market Line CAPM and Market Efficiency Alpha ( a ) vs. Beta ( b ). CAPM. Capital Asset Pricing Model An equilibrium model underlying modern finance theory Based on diversification principle and simplified assumptions Who developed it?

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Return and Risk: The Capital-Asset Pricing Model (CAPM)

Return and Risk: The Capital-Asset Pricing Model (CAPM). Expected Returns (Single assets & Portfolios), Variance, Diversification, Efficient Set, Market Portfolio, and CAPM. Expected Returns and Variances. For Individual Assets

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CAPITAL ASSET PRICING MODEL

CAPITAL ASSET PRICING MODEL. MANAGERIAL FINANCE l June 4, 1999 GEORGE WEBSTER. VALUE CONCEPTS. Traditional financial measures have limitations due to accounting distortions A variety of measures capture the economic performance of the firm

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The Capital Asset Pricing Model

The Capital Asset Pricing Model. Chapter 9. Capital Asset Pricing Model (CAPM). Equilibrium model that underlies all modern financial theory Derived using principles of diversification with simplified assumptions

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Chapter 10 Return and Risk: The Capital-Asset-Pricing Model (CAPM)

Chapter 10 Return and Risk: The Capital-Asset-Pricing Model (CAPM). 10.1 Individual Securities 10.2 Expected Return, Variance, and Covariance 10.3 The Return and Risk for Portfolios 10.4 The Efficient Set for Two Assets 10.5 The Efficient Set for Many Securities

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Risk Return & The Capital Asset Pricing Model (CAPM)

Chapter 10. Risk Return & The Capital Asset Pricing Model (CAPM). To make “good” (i.e., value-maximizing) financial decisions, one must understands the relationship between risk and return We accept the notion that investors like returns and dislike risk

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Capital Asset Pricing Model

Capital Asset Pricing Model. Introduction. The CAPM was developed in the mid 1960’s by three researchers William Sharp, John Linter and Jan Mossin independently. CAPM is really the extension of Markowitz Portfolio theory.

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Return and Risk: The Capital Asset Pricing Model (CAPM)

Chapter 11. Return and Risk: The Capital Asset Pricing Model (CAPM). Key Concepts and Skills. Know how to calculate expected returns Know how to calculate covariances, correlations, and betas Understand the impact of diversification Understand the systematic risk principle

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Risk and Return and the Capital Asset Pricing Model (CAPM)

Risk and Return and the Capital Asset Pricing Model (CAPM). For 9.220, Chapter. Risk Return & The Capital Asset Pricing Model (CAPM). To make “good” (i.e., value-maximizing) financial decisions, one must understands the relationship between risk and return

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Capital Asset Pricing Model

Capital Asset Pricing Model. presented by: Ryan Andrews and Amar Shah. Definition of CAPM. Capital Asset Pricing Model

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Understanding Risk and Return with CAPM

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Presentation Transcript

The Capital Asset Pricing Model

The Capital Asset Pricing Model

Ch 11 Return and Risk: The Capital Asset Pricing Model CAPM

Risk, Return, the Capital Asset Pricing Model

The Capital Asset Pricing Model

The Capital Asset Pricing Model

The Capital Asset Pricing Model

Capital Asset Pricing Model

Capital Asset Pricing Model

Capital Asset Pricing Model

The Capital Asset Pricing Model

Risk, Return, and the Capital Asset Pricing Model

Capital Asset Pricing Model

Return and Risk: The Capital-Asset Pricing Model (CAPM)

CAPITAL ASSET PRICING MODEL

The Capital Asset Pricing Model

Chapter 10 Return and Risk: The Capital-Asset-Pricing Model (CAPM)

Risk Return &amp; The Capital Asset Pricing Model (CAPM)

Capital Asset Pricing Model

Return and Risk: The Capital Asset Pricing Model (CAPM)

Risk and Return and the Capital Asset Pricing Model (CAPM)

Capital Asset Pricing Model

Risk Return & The Capital Asset Pricing Model (CAPM)