Stack Exchange Network

Stack Exchange network consists of 175 Q&A communities including Stack Overflow, the largest, most trusted online community for developers to learn, share their knowledge, and build their careers.

Visit Stack Exchange

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.

5
votes
1answer
1k 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}) - ...
2
votes
1answer
1k views

Risk-Free Rate determinant in CAPM

I have trouble understanding what type of maturity to use when calculating CAPM. My professor uses the 3-Month risk-free rate to ...
6
votes
5answers
2k 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 Low)...
4
votes
2answers
725 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 ...
2
votes
2answers
4k views

Do two stocks with the same beta have a correlation of 1?

If two stocks have the same beta over same time period, does it mean they are 100% correlated over that time period? In a CAPM framework, a stock's beta is defined as $$\beta_1={\rm Cov} (R_1, M) / {...
2
votes
1answer
224 views

Calculating the pricing error in Fama-Macbeth Regression for Fama/French 5 Factor model

I'm very much new to this area and I need to know on how to calculate the pricing error in Fama/French 5-Factor model. The evaluation was done using the Fama-Macbeth approach. I did everything as ...
1
vote
1answer
2k views

Excess, Residual and Active Return

in CAPM. What's the difference between these different types of returns? Active return Excess return Residual return
0
votes
1answer
952 views

Calculating the correlation of stock A with stock B

Background: This question is from Active Portfolio Management by Grinold and Kahn (Exercise 4 of Chapter 2- Consensus Expected Returns: The Capital Asset Pricing Model). I have no background in ...
8
votes
5answers
3k views

Under the CAPM, how do I deal with market returns being below the 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 ...
4
votes
2answers
1k 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 ...
4
votes
3answers
13k 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
2
votes
3answers
247 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 that ...
2
votes
1answer
929 views

annual excess returns from CAPM on monthly total returns

I want to calculate annual excess returns on portfolios using monthly returns for a CAPM (for the assets in the portfolio as well as for the benchmark), in order to have more information on the ...