The capital asset pricing model is a model that allows to determine the theoretical rate of asset returns required by an investor, given the asset systematic risk or market risk.

learn more… | top users | synonyms

0
votes
0answers
15 views

I have a test coming up and I could really use an explanation to this example problem

This test is on CAPM and portfolio optimization Suppose that investors A and B can invest in two risky assets and a riskless asset. The first risky asset has an expected annual return of 10%. The ...
0
votes
2answers
41 views

How to interpret my Four-Factor Model results?

I am currently writing my thesis using the Carhart Four-Factor Model. I got my results but I am not sure how to word them. Coefficient on my SMB is 0.22. Wording: if small companies returns are 1% ...
0
votes
2answers
49 views

How to interpret Carhart Four-Factor Model?

I am reading up on the Carhart Four-Factor model. Let's say there a regression of stock returns on alpha, RM-RF, ...
0
votes
1answer
32 views

Fame-French alpha for a single stock

I want to study the impact of corporate culture on risk-adjusted stock returns. After quantifying corporate culture I wanted to use panel methodology (I have a sample of 100 S&P500 companies over ...
1
vote
2answers
57 views

How to apply the CAPM to 6 stocks from different markets?

I would like to apply the capital asset pricing model (CAPM) for selecting proportions of 6 different stocks. In introductory books, the CAPM model assumes that there is one market index (e.g. the S&...
1
vote
0answers
28 views

Levered beta with changing equity/debt ratios

I know how to calculate a bottom up levered beta for a privately held and not publicly traded company with Hamada (Proof of Hamada's Formula (Relationship between levered and unlevered beta)) and ...
3
votes
1answer
125 views

Mathematical Derivation of Residual Risk

I understand the difference between Excess, Residual and Active Returns. I also understand what Active Risk; defined as: $\sigma_{r_P-r_B}$ (i.e. standard deviation of the difference in returns ...
0
votes
1answer
32 views

Beta = 1 and 0. Type of portfolios

I read in E. Quian's "Quantitative Equitity Portoflio Management" the following: A traditional long-only portfolio [with unit beta] would have most of its risk in the market risk. However, a zero ...
1
vote
0answers
46 views

“Risk” Factor vs Double Sorts

With regards to a cross-sectional asset pricing (stocks) study, I am testing if one variable can explain another. One common approach to do this, is to use the double-sorting portfolio technique (sort ...
2
votes
1answer
38 views

News about CAPM/FF3FM or asset pricing models in general

Is there any interesting news about CAPM/FF3FM or asset pricing models in general lately? Would have been greatly appreciated!
0
votes
2answers
39 views

CAPM - Do I use start or end of period prices?

If I use monthly price data in the standard CAPM, should I take the price at the beginning or the end of the month? What is the convention? Or does it not matter? Is there any literature that deals ...
2
votes
2answers
93 views

CAPM, DCF, and Jensen's inequality

One way to value a cashflow is to first calculate the expected return from CAPM, and then use the expected return to discount the future cashflows. The problem here is that the expected return from ...
2
votes
1answer
217 views

how can we know the residual return will be uncorrelated with the market return

I was reading that if we know a portfolios beta we can break the excess return on that portfolio into a market component and a residual component. ...
0
votes
1answer
55 views

Excess, Residual and Active Return

in CAPM. What's the difference between these different types of returns? Active return Excess return Residual return
1
vote
1answer
64 views

Regressing using Fama-French portfolios with small amount of stocks

I'm doing some research for my thesis and I was wondering if it is possible to only use monthly stock price data for 22 stocks and construct Fama-French portfolios out of them and then regress? What ...
0
votes
1answer
36 views

Monthly market value data of indices: where to get?

I am currently working on a paper related to portfolio optimization. As of this moment, I am considering to use a dataset consisting of the following indices: MSCI World MSCI Emerging Markets SP ...
0
votes
2answers
79 views

CAPM betas at different horizons

When taking capital budgeting decisions appropriate cost of capital should depend on the horizon of the investment. So the beta of a stock, i.e. it's covariance with the market should depend on the ...
2
votes
1answer
89 views

Correlation -1 and standard deviation [closed]

My book says that for a portfolio of two stocks: $\sigma_p = \sqrt{w_A^2 \sigma_A^2 + (1-w_A)^2 \sigma_B^2 + 2 w_A (1 - w_A) \rho_{AB} \sigma_A \sigma_B}$ Elsewhere it says that if the correlation ...
4
votes
3answers
184 views

Why are investors risk-averse?

In CAPM, we assume people are risk-averse and people get compensated for the systematic risk they suffer. The assumption that most people are risk-averse makes sense, but why are the rational ...
3
votes
2answers
81 views

Security Market Line & Required Rate of Return for Projects

A standard definition of the Security Market Line is as follows: The security market line ("SML" or "characteristic line") graphs the systematic (or market) risk versus the return of the whole ...
3
votes
1answer
58 views

CML, SML and Pricing

hi i have a confusion about what conclusion I can draw regarding the pricing from the Capital market line and security market line. As far as I know, if an asset that is lying below the SML is ...
3
votes
4answers
222 views

Intuition behind Fama-French factors

In the Fama-French 3-factor model the portfolio returns are explained by the market the SMB factor (Small [market capitalization] Minus Big) and the HML factor (High [book-to-market ratio] Minus ...
0
votes
1answer
71 views

Stock valuation/stock pitch and CAPM

If you were valuing a stock (say to pitch a stock for the buy side), you are looking for stocks that the market has mispriced. Your aim is to have a profitable long or short strategy. Can you use the ...
2
votes
0answers
80 views

Liquidity Adjusted Asset Pricing Model

I have a data set with 4000 companies and I have calculated a liquidity measure of each of the company in the dataset as Where, Turnover is the monthly average ratio of daily volume to shares ...
3
votes
1answer
88 views

How to get Correlation using Options data?

I can calculate the "Implied Beta" using implied volatility for the option stock, and implied volatility for the market (VIX). Is there any way to calculate also the correlation without performing a ...
1
vote
0answers
28 views

Change in portfolio when IPO announced

I'm wondering whether there would be a change to my answer of the change in portfolio when there is a new stock introduced. My investment strategy is to maximise expected return such that my standard ...
0
votes
0answers
36 views

Return, STD and CAPM based on Continuously compound return on daily prices

Mission: For some ETF, Get 1, 3, 5 years: Return STD CAPM parameters (alpha, beta) Reference if I calculated correctly: Yahoo finance performance & risk data Raw data: Daily adj. close ...
9
votes
1answer
143 views

Estimate Beta of CAPM from Implied Volatility?

In the CAPM theory Beta of asset $i$ are estimated in this way: $ \beta_i = \frac{\sigma_{im}}{\sigma^2_m} $ where $\sigma_{im} = \rho_{im} \sigma_i \sigma_m$ But all these data are historical data. ...
2
votes
1answer
76 views

Understanding CAPM, CML, and efficient portfolios

I'm trying to understand the CAPM model and how we can use it to understand efficient portfolios. Specfically, I'm trying to use the CML line (mapping expected returns and standard deviations of ...
5
votes
4answers
195 views

Market returns below risk free rate

Let's say I'm using CAPM to estimate the cost of equity, so I need expected market returns for the calculations. The standard approach is simply to compute arithmetic mean of an index (or rather its ...
1
vote
0answers
38 views

Generalized method of moments concept in CAPM testing

In the course of my master thesis I’ve come across a paper by Carr and Wu (2009) where the authors evaluate whether returns on variance swaps can be explained by the simple CAPM. (really only market ...
2
votes
2answers
122 views

Fundamental CAPM questions

A couple questions about the CAPM model: If I only know the riskfree rate and expected market return, how do I solve for $\beta$ ? Given the stock's variance, how do I solve the percentage of it ...
1
vote
0answers
88 views

Risk-Free Rate In CAPM

Let's start out with the CAPM equation itself: $E(R_i) = R_{f1} + \beta_{i}(E(R_m) - R_{f2})$ Are there cases where one should choose a different $R_{f1}$ and $R_{f2}$ (Risk Free Rates Of Interest) ...
1
vote
2answers
126 views

how negative rates (mr and rf) affect CAPM

I don't understand how the negative rates factor into this and what it means in the market ...
2
votes
2answers
128 views

What do you do with low r-squared when calculating high-frequency beta

I am calculating a high-frequency beta. For example I have 90 days of data of the S&P and GOOGLE and I have 10-minute percent returns for each instrument. Each day has 34 10-minute percent returns ...
0
votes
0answers
152 views

Interpretation of the CAPM model under Stochastic Portfolio Theory framework

The CAPM under the Modern Portfolio Theory approach is given as: $$ R_i = \beta_i R_\pi $$ Where $R_\pi$ the portfolios expected excess returns Under the stochastic portfolio theory approach: $$ r_i ...
4
votes
1answer
114 views

Fit linear model to higher moments of CAPM

How can one fit a linear model to the higher moments of CAPM in R? Fitting a linear model to the second moment (classical CAPM) would be ...
1
vote
1answer
33 views

Intrepreting the Capital Market Line plot

I am looking at plots of the Security Market (SML) line and Capital market line (CML). The X axis is the beta for the SML and Standard deviation for CML; the y axis is labeled with excess return. ...
1
vote
1answer
15 views

Measure difference between estimations and historic returns

For every day in a year, I have the return on an asset and the CAPM estimation for the return. I want to measure the average difference between the set of returns and set of estimations. So far, I ...
0
votes
1answer
89 views

Apply CAPM using returns on a foreign currency as the market returns

I want to analize Bitcoin returns using the CAPM. I was thinking if it makes sense to compare returns of (BTC/USD) against (EUR/USD), taking the latter as the market returns. However, since EUR is ...
0
votes
1answer
643 views

Linear Model setup for Second-pass Regression

I'm confused on modeling the second pass regression given the beta's from the first pass. First-pass regression : $r_{it} - r_{ft} = a_{i}+b_{i}(r_{Mt}-r_{ft})+e_{it}$ For estimating this model (9 ...
2
votes
2answers
83 views

Does anyone know where I can find a free efficient frontier tool, or an informative and legitamate/academic graph of the efficient frontier?

I'd like to build a portfolio based upon modern portfolio theory and I'd like to find a tool I can use to calculate the proper mix of asset classes. Can anyone help with this? I think a good chart/...
8
votes
1answer
2k views

How to test the 5 Factor CAPM of Fama & French (2014)?

I would like to conduct a study testing the 5 factor CAPM, using UK stocks. Does anyone have any suggestions of how I can do this? Could this task be as simple as regressing average returns for a ...
5
votes
4answers
522 views

Is CAPM a failure?

CAPM says that in order to generate high returns I need to take more systemic risk. But the ex-post results do not seem to validate this theory. There is a ETF SPHB - PowerShares S&P 500 High ...
1
vote
3answers
752 views

Is the CAPM beta equivalent to the coefficient estimate of an OLS regression?

The $\beta_i$ of an asset or portfolio is defined as its covariance with the market (which itself therefore has a beta of $\beta_m = 1$). The CAPM looks a lot like a simple linear regression model. Is ...
1
vote
1answer
114 views

How to use WACC for investment?

How to use a value of WACC? I have calculated WACC of company to be 7%. What if company had smaller or bigger WACC? Which one would attract investment?
3
votes
1answer
66 views

How consequential are violations of the efficient diversification assumption of asset pricing models?

When using asset pricing models such as the CAPM or the Fama-French four factor model to determine the risk-adjusted return of a portfolio, does this strictly require efficient diversification of the ...
1
vote
2answers
777 views

Difference between CAPM and mean variance optimization

Is the mean variance optimization the same thing as the capital asset pricing model? Or is the mean variance only a part of CAPM?
0
votes
1answer
315 views

CAPM (SML) Problem

I got 1.3636 for beta for the problem below(165/121). But I became so unsure about the answer when I solved (c) because then the market risk becomes larger than the variance of Stock A. Beta^2*σ(M)^2=...
-1
votes
2answers
179 views

Question 1.18 from Hull's Financial Risk management CAPM

A portfolio manager maintains an active portfolio with beta of 0.2. Risk-free rate is 5% The market return for a particular year is -30% The fund produced a result of -10%. He claimed the return was ...