# Tagged Questions

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.

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### Is Arithmetic Return Bias Basis of Low Vol Anomaly?

An observation in capital markets is that the connection between return and risk (measured as volatility) is not that straightforward (at least not as modern portfolio theory assumes). One interesting ...
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### 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. ...
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### 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 ...
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### 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 ...
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### 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 ...
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### 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 ...
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### 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 ...
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### 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 ...
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### 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 ...
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### Validity of CAPM

I came across some literature regarding "Framing Theory" or "Prospect Theory", and the validity of CAPM. I was wondering if you could shed some light on a few questions I have in this regard: ...
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### Beta arbitrage in CAPM

i'm following the "Computational Investing 1" course at Coursera.org, I was affascinated by the Beta arbitrage of CAPM Video: https://class.coursera.org/compinvesting1-002/lecture/view?lecture_id=119 ...
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### Why is the CAPM securities market line straight?

Let $\gamma$ be the expected return, in terms of its exponential growth rate, of the market asset. If we set $\gamma=\mu-\sigma^2/2$ as explained by the DolĂ©ans-Dade exponential, then the expected ...
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### 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 ...
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### 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?
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### different amount of information on return correlations from shorter and longer periods?

I want to calculate annual excess returns on portfolios using monthly (total) returns for a CAPM (for the assets in the portfolio as well as for the benchmark), in order to have more information on ...
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### Unsystematic/Idiosyncratic/Firm-specific volatility/variance in the market model?

I was asked to use idiosyncratic volatility as a regressor in a cross-sectional regression upon cross-sectional returns as the dependent variable. Returns can be thought of as the raw log stock return ...