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Questions tagged [capm]

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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Calculating idiosyncratic risk of stock without beta or risk free rate

I have been given the expected returns and standard deviations of 2 stocks A and B, as well as the standard deviation of the market portfolio and correlation between security A and the market ...
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23 views

difference between CAPM and single factor model [duplicate]

Is CAPM an example of the single factor model of stock returns, or are they just two different models?
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213 views

What if CAPM cost of equity is negative?

Dear Community members, I calculate 5 years trailing beta using capm. After that I calculate estimated cost of equity. However, what I have is that most of the observations have negative cost of ...
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115 views

Daily idiosyncratic volatility?

I have a long daily times series of individual stocks and would like to obtain daily idiosyncratic volatility (keeping the same frequency). Apparently, the widely used methodology of Ang 2006 would ...
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64 views

CAPM: Bond index as proxy for Rf

Is it possible to use a bond index as a proxy for Rf in CAPM? Please let me know what is the issue here.
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Cost of equity proper way of calculation

Dear Community members, I need to calculate cost of equity following the following description: (Please, correct me if I misinterpret the meaning) "The annualized cost of equity, re(t), is ...
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35 views

CB-CAPM: how should an agents consumption be interpreted in CB-CAPM?

I have read chapter 9 from Intermediate Financial Theory, Jean-Pierre Danthine & John B. Donaldson (2005) to understand consumption based CAPM and some stuff I don't understand that well in the ...
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80 views

Examination of Betting Against Beta

http://pages.stern.nyu.edu/~lpederse/papers/BettingAgainstBeta.pdf In this article the authors explain a theory/strategy called Betting Against Beta. My background is more in Math rather than finance ...
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The utility function in Betting Against Beta

http://pages.stern.nyu.edu/~lpederse/papers/BettingAgainstBeta.pdf Betting Against Beta strategy is presented in the link above. Most of the theory and derivation is based on a utility function given ...
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177 views

Testing the statistical significance of alphas in the CAPM

I am trying to test the statistical significance of the alphas in my trading strategy. However, I do not understand the difference between the alphas generated in R. To test the statistical ...
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37 views

The relationship between stock holding period and investors’ expected return?

Is there any relationship between stock holding period and investors’ expected return and consequently stocks intrinsic values? Why deriving equilibrium models like CAPM require assumption that stock ...
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44 views

Measuring size risk in CAPM. How one could go about?

I am using valuation methods (e.g. CAPM) in order to measure some projects "baseline" return. I'm not using these measures for stocks returns, but to evaluate specific projects (e.g. dam constructions)...
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What exactly makes CAPM an equilibrium model?

CAPM comes from Markowitz' portfolio theory. We study agents utility maximization behavior, and get results like two-fund separation. Every agent holds the tangency portfolio, combined with the risk-...
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338 views

Calculating beta to market

Let's say we want to compute beta to S&P500 of a portfolio, using 3 years of weekly returns, as of today. We would take each stock in the portfolio and regress the weekly returns of that stock ...
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71 views

In the “betting against beta” paper, what exactly is the “BAB factor”?

I refer here to the paper "Betting against beta" by Pedersen and Frazini. In the model, they construct the following factor, on page 5. I don't quite understand how this portfolio is being ...
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32 views

Markowitz w/ riskless asset & CAPM

If risk free rate ($R_0$) is bigger than expected return on minimum variance portfolio ($\bar{\mu}$), so $R_0>\bar{\mu}$. I.e. the tanget portfolio is on the risky inefficient portfolio frontier ...
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331 views

Proxy for daily risk-free return in CAPM

Say I am estimating the following Capital Asset Pricing Model: $$R_t = R^f_t - \beta(R^m_t - R^f_t)$$ where $R^f_t$ is the risk-free return, and $R^m_t$ is the return for some market index, say the ...
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How to test the CAPM empirically and how do I use this Kenneth French dataset?

I'd like to test whether CAPM holds. My guess is that I first need to find a market portfolio. Then, over some period, I calculate its excess return $R_M - r_f$. Then I calculate the return of some ...
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What Process Does the Market Follow in the CAPM?

Consider a multiperiod version of the CAPM $$E_t[r_{i,t+1}-r_{f,t+1}]=\beta_{i,t}E_t[r_{m,t+1}-r_{f,t+1}]$$ where $E_t[r_{i,t+1}-r_{f,t+1}]$ is the time $t$ expectation of the time $t+1$ excess ...
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97 views

Period length and maximum data points on estimating the 5-year Beta-factor

I currently read chapter 8 Beta from Bali, Engle and Murray's book Empirical Asset Pricing: The Cross Section of Stock Returns and do not understand their estimation on the five-year Beta-factor (...
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340 views

CAPM model as a regression

The CAPM model states that the returns of a stock are- $r_s=r_f+\beta (r_m-r_f)+\varepsilon_s$ The $\beta$ defined above is then calculated as $\frac{cov(r_s,r_m)}{var(r_m)}$. My question is ...
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450 views

What is the CAPM implication for Sharpe Ratios?

Suppose a world where the CAPM holds, i.e. stocks with higher beta have higher expected returns. What would be in this world the implication for Sharpe Ratios? Would stocks with higher beta also have ...
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Is Consumption CAPM a special case of Intertemporal CAPM?

Intertemporal CAPM state variables are related to the future investment opportunity set. In Consumption CAPM the state variable is consumption ? Is it the correct way to think about it?
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Is CAPM a cross sectional or time series model?

Given that CAPM is an equilibrium model, it prices the assets in absolute terms. Asset pricing studies use CAPM/ICAPM/CCAPM in a cross-sectional framework i.e. stocks with higher betas will have ...
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114 views

Finding a minimum variance portfolio when using a regulariser?

I am aware that the minimum variance portfolio of a market with $n$ securities can be shown to be: \begin{equation} w^* = (1^T_n\Sigma^{-1}1_n)^{-1}\Sigma^{-1}1_n, \\ s.t. \ \ 1^T_nw = 1 \end{...
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Can Black-Litterman-type expected return estimation be used for regional ETFs?

The Black-Litterman approach to return estimation overcomes the problems associated with estimating expected returns via historical averages by determining the equilibrium returns implied by the ...
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129 views

Risk Compensation

I try to understand the different ways to compensate for risk. In the CAPM, when we plot the excess return against the risk, we find that portfolios of interest lie on the efficient frontier (i.e. ...
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Mathematical quantification of compensation for risk

I am learning about the CAPM, and still new to this. In this framework, given a market portfolio M, and a portfolio P, we regress the excess return of the portfolio $r_P$ versus the excess return of ...
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78 views

How do you interpret a positive portfolio weight (when using CAPM and CML to calculate efficient portfolios)

I am asked to solve the following homework question: Risk free rate: 2% Expected excess return on market portfolio: 8% Standard deviation of market portfolio: 20% The efficient portfolio has the ...
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106 views

Understanding Fama/Frenchs' Five Factors - Returns or Excess Returns?

two short questions: If I download the five factor data from Kenneth French's website (http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html) and for example calculate the average ...
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36 views

Should the valuation decision of the following question be undervalued or overvalued?

The official solution to this question is B, but I don't understand that if the recommendation is given by the CAPM model, then the CAPM estimated return should be regarded as "fair" and benchmark for ...
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349 views

Beta in foreign exchange market

Would it make sense to use a regression to calculate beta for returns on a foreign exchange currency (regressed on a market average of all currencies)? Would the beta make sense? (why/why not) ...
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230 views

How high can Beta be in CAPM?

I recently got an interview question for a junior analyst role asking if risk could be infinite in CAPM, and I wasn't sure how to answer it. I don't see how an asset could be infinitely more volatile ...
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160 views

Private Equity: Direct Alpha vs Excess IRR

I'm trying to understand the advantages and disadvantages of using Direct Alpha versus Excess IRR for computing excess returns over a market index for private assets. Wikipedia references a highly ...
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162 views

How much capital to allocate between two trading strategies given average daily P&L and their Sharpe Ratios?

Let's say you have two trading strategies and all you're given is information about their average daily P&L and the Sharpe ratio of each strategy. Trading strategy A's daily average P&L is 10,...
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47 views

CAPM Beta zero-correlation performance issue

I am working on a research project that requires me to run a CAPM regression on all intra-day stock quotes in NSDAQ, NYSE and all other U.S. exchanges since 1993. The precision of the quote data is ...
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What CAPM/Financial ratios involve kurtosis?

Simple question, what universally accepted financial ratios involve kurtosis? I'm not looking for a made up one. I want something that academics may have discussed.
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960 views

Calculating alpha and its meaning

According to wikipedia, CAPM model is described by: $E(R_{i})=R_{f}+\beta _{{i}}(E(R_{m})-R_{f})$ And according to website such as http://investexcel.net/jensens-alpha-excel/, $\alpha = E(R_{i}) - ...
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718 views

Philosophical Question about Factor Models

This might be a dumb question, but on a purely understanding level it is hard for me to wrap my head around the basic interpretation of some factor models. With the CAPM the interpretation of the $\...
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210 views

CAPM Calculations

Im trying to calculate Alpha using CAPM & I have data on everything necessary. $$R_t-R_f={\alpha}+{\beta}\times(R_m-R_f)$$ i.e. $${\alpha}=R_t-R_t-{\beta}\times(R_m-R_f)$$ In more detail, I ...
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647 views

How to build Factor model like Fama & French (2014)?

I would like to conduct a study where I build a factor model based on the characteristics/variables I have collected about firms, using a couple of countries. I have acquired two Excel data files ...
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Zero-beta assets and the Sharpe-Lintner CAPM

I'm reading The Capital Asset Pricing Model: Theory and Evidence (Fama and French, 2004) and came across the following statement: "A risky asset’s return is uncorrelated with the market return—its ...
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401 views

Does CAPM hold for markets with two risky assets?

Presentations of the CAPM often include statements similar to this: While idiosyncratic risk can be "diversified away", systematic risk cannot, which is also expressed in the CAPM, which states ...
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311 views

Risk-Neutral CAPM

In the paper Measuring Equity Risk with Option-implied Correlations, Buss and Vilkov replace the standard CAPM beta: $$ \beta_{iM,t}^P=\frac{\sigma_{i,t}^P\sum_{j=1}^N w_j \sigma_{j,t}^P\rho_{ij,t}^P}...
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469 views

What are the assumptions in the first-stage of Fama-MacBeth (1973)?

According to the CAPM, the expected return of asset $i$ is: $E(Z_i) = \beta_{im} E(Z_m)$ where $Z_m$ is the excess return on the market portfolio, and $Z_i$ is the excess return of asset $i$ over ...
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77 views

Two definitions of Beta

I have seen two definitions of Beta one is $$\beta = \rho\dfrac{\sigma_{asset}}{\sigma_{market}}$$ Here $\rho$ is the correlated coeffient another one is $$\beta = \dfrac{r_{expect} - r_{risk\ free}}{...
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Using CAPM to find correlation of two assets with each other

I stumpled upon an exercise in an investments book: The data below describe a three-stock financial market that satisfies the single-index model. ...
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101 views

Package ‘PerformanceAnalytics’ - Risk-free rate : Trouble using CAPM.beta() function

This is the first time I use the Package ‘PerformanceAnalytics’. I have a problem when it comes to use "Rf" (risk-free rate) when using the CAPM.beta. I use EONIA as a proxy for the risk free-rate. ...
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10k views

Difference between CAPM and single index model

which is the difference betwee a model like CAPM and a single index model? Is the first a special case of the second? Best
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935 views

How to use factor models for prediction?

I was looking at this thread here, reading about how to run regressions and thereby construct factor models. Assuming these factor models are properly specified, I am trying to better understand how ...