CAPM
This financial model calculates the expected return of an asset based on risk-free rate, beta, and market risk premium.
the Capital Asset Pricing Model (CAPM)
A stock with a beta of 1.5 is expected to move how much if the market increases by 10%.
15% (1.5 × 10%)
risk is measured by this statistical term
standard deviation
In CAPM, this represents a stock’s sensitivity to market movements.
BETA
Difference between CML and SML
CML represents risk-return combinations for efficiently diversified portfolios,
SML represents individual securities
In MPT ( modern portfolio theory), which line do we use to find the best portfolio that is fairly priced?
Capital Market Line
How does the risk of the portfolio change with assets that have a negative covariance?
Risk decreases
Developed by Harry Markowitz, focuses on maximizing return for a given level of risk through diversification.
Modern Portfolio Theory (MPT)
efficient frontier
curve represents the set of portfolios offering the highest expected return for a given level of risk.
market risk premium
Additional return investors expect when taking on market risk.
What does point M on the efficient frontier represent?
tangency portfolio (or market portfolio)
In an efficient market, CAPM suggests that this is the only factor (risk) affecting expected returns.
systematic risk (beta)