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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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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Is this methodology to calculate Alpha using multi-factor regression model correct?

I am trying to find out Historical Alphas of a bunch of fund returns ${F_i}$ by Using Regression Model$(stepwise)$ with regressors as its underlying exposure-returns(risk-free rate subtracted) i.e. $$...
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57 views

How to interpret CAPM model?

I want to run CAPM model on two portfolios P1 and P2. Where CAPM is Rt - Rft = λ0 + λ1 (Rmt - Rft) Results which I got: Portfolios Intercept Coefficient of Rm-Rf Adjusted R2 P1 0 i.e not sig. ...
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80 views

Stochastic Differential equation: CAPM

Let $R=(R_1, \dots ,R_M)$′ denote a vector of excess returns of M assets observed at $n$ time points, $0<t_1<t_2< \cdots <t_n<T$, within a time span $T>0$. We wish to explain the ...
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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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Residual Risk and Variance

I've solved part a, but am struggling with b and c. $x_m$ is the market portfolio vector, and I think $T$ should be a diagonal matrix. Any hints greatly appreciated!
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1answer
96 views

Why is there inconsistency in WACC vs unlevered return?

To evaluate an enterprise we can discount free cash flow by either the unlevered required rate of return or the WACC. With Tax we have: $WACC=R_e \frac{E}{E+D}+R_f\frac{D}{E+D}(1-t)$ where $R_e$ is ...
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130 views

CAPM - market portfolio vs real portfolio

I'm trying to understand the relation (if there is any) between the market portfolio, as described by the CAPM theory, and a real portfolio (just like the one I plotted in the image below). More ...
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46 views

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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179 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 ...
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133 views

Best method for determining the market value of a stock before it is issued

I am attempting to determine the hypothetical market value of a stock for a company emerging from bankruptcy as of a date prior to actual the issuance of the stock. For example, let's say the formerly ...
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34 views

How to derive the CAPM from maximizing the Sharpe ratio?

I know how to derive at the CAPM from a microeconomic foundation. In a recent University course I stumbled over a slide that derived the CAPM solely from the Sharpe ratio: I cant come up with that ...
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Asset risk relative to market portfolio risk - derivation problem

I am currently studying the CAPM, and at the moment I am focusing on beta. I am using the following book: Danthine, J-P and J. B. Donaldson (2014): Intermediate Financial Theory (3rd Edition) http://...
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43 views

Question about CAPM Betas - Causes of Beta Movement Query

CAPM betas are measures of systematic risks, which include things like the exchange rate, inflation, interest rates, etc. What I'm confused about is described below: E.g. suppose I'm looking at one ...
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29 views

Non-redundant asset?

I've been solving many exercises with three assets that have two possible payoffs each, one payoff per possible future state. The question is always the same, i.e. is any asset redundant. After ...
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45 views

No risk free security?

Imagine market without a risk free security. How is security market line constructed? How is it interpreted?
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43 views

Testing pricing errors on the SML for significance with R

I have been attempting to do a cross-sectional test of the CAPM. To do this, i have estimated the betas of 49 industry portfolios with time -series data. And then done a cross sectional regression, ...
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86 views

Fama-French 3, Carhart 4, Fama-French 5 Factor models return borderline 0% R2 (max. 6.6%). Time series regression

I am currently working on an industry specific time series analysis of European Equities between 201001 and 201812. I use the European Fama French factor returns (plus the momentum factor return) that ...
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66 views

Evaluating Fama French 3 factor model Using Fama Macbeth

Hi Can someone please explain me how the cross sectional calculation can be done. For an example, I'm having a vector like this. Vector 1: This is the vector where all the excess returns for n ...
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1answer
115 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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181 views

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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155 views

CAPM and expected future spot price

Let $S_t$ be the current spot price at time $t$ and $S_T$ be the spot price in the future (at time $T$). Assume the stock pays continuous dividends $d$. How does the CAPM imply that the expected ...
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124 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 ...
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38 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 ...
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219 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 ...
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24 views

Deriving CAPM from APT framework

I was wondering if it is possible to derive the CAPM from the APT? My argument is that CAPM basically just is a 1 factor model, where the APT has multiple factors. Can any of you guys help me?
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variation in portfolio vs systematic risk

I am currently studying about the CAPM, and I stumbled upon something that I can see is different, but i can't make the distinction. This isn't some mathematical question per se, but I hope that you ...
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43 views

Are BARRA's Multiple-Factor Risk models rational asset pricing models?

Barra's Multiple-Factor Models for risk (e.g. USE3, USE4, CNE5) are much like those models used in empirical asset pricing studies such as CAPM, Fama-French three-factor model and others. I'm not ...
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Optimal asset allocation

I apologize if similar question has been already asked. I have to compute optimal allocation of investment I between market asset and risk free asset. The investor's utility function is $U(w)=E(r_P)-...
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Deriving Single Index Model (Market Model)

is the return of the stock of observation is the return of the reference market is the regression coefficient between the observed stock and the reference market is the regression intercept between ...
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2answers
145 views

Best practice approach for computing beta

I was wondering how one should choose parameters such as "frequency" of returns (daily, monthly etc.), "time frame" (1 or 3 or 5 years of historical data etc), benchmark (same of the portfolio or the ...
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How/Why Markowitz model is normatitive while CAPM positive?

I've tried economic books but they only give this "should/is" explanations and I still cannot see how it applies to MPT. On the other hand, almost every paper and book gives these adjectives before ...
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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 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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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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56 views

CAPM test methodology

Setting If we test the CAPM using Fama-MacBeth regressions we do the following: First, run cross-sectional regressions to determine the beta loading $$ R^i_t- r^f_t = a_i +\beta_i (R^M_t- r^f_t) + \...
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what is a reasonable beta in CAPM?

I want to predict expected returns for assets using a CAPM, to calculate unexpected (unpredictable, idiosyncratic, non-systemic) returns in portfolios. My CAPM estimated on monthly total gross ...