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FNBSLW 345

InvestmentsChapter 7OverviewThe assumptionsThe Model

AssumptionsThe ModelCapital Asset Pricing ModelMarkets are competitive, equally profitableNo investor is wealthy enough to individually affect pricesAll information publicly available; all securities publicNo taxes on returns, no transaction costsUnlimited borrowing/lending at risk-free rateThe modelAssumptionsCapital Asset Pricing ModelInvestors are alike except for initial wealth, risk aversionInvestors plan for single-period horizon; they are rational, mean-variance optimizersUse same inputs, consider identical portfolio opportunity setsThe modelAssumptionsCapital Asset Pricing ModelAll investors will choose to hold the market portfolio

The modelAssumptionsCapital Asset Pricing ModelThe market portfolio will be on the efficient frontier

The modelAssumptionsCapital Asset Pricing ModelThe risk premium on the market portfolio will be proportional to the variance of the market portfolio and investors typical degree of risk aversion.

The modelAssumptionsCapital Asset Pricing ModelThe risk premium on individual assets will be proportional to the risk premium on the market portfolio and to the beta coefficient of the security on the market portfolio.

The modelAssumptionsMarket Equilibrium?The modelAssumptionsThe first modelThe modelAssumptionsThe Index modelThe modelAssumptionsThe Capital Asset Pricing ModelThe modelAssumptionsThe Security Market LineThe SML

The modelAssumptions