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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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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318 views

Beta and the Assumption of IID Returns

For two stocks that are independent and identically distributed (iid), do they have the same beta? Does the number of data points matter?
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270 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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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
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732 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. ...
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268 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 ...
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414 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 ...
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1answer
419 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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327 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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3k views

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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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) / {...
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109 views

Can the historical probability be the same as the risk neutral probability measure?

In particular lets consider a zero-beta asset $i$ (in the CAPM sense). Let $R_f$ be the risk free rate $R_i$ the return on the asset $i$ $R_m$ the return on the market portfolio $\beta=\frac{Cov(R_i,...
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4k 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?
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7k views

Why do stocks with a negative beta return less than the risk free rate?

Let's say we have two stocks, Stock A and Stock B. Both of them have the same standard deviation $\sigma$, and therefore have the same risk. The only difference is that Stock A has a perfect ...
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5k views

how to chain monthly excess returns into annual?

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 ...
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225 views

Using the Fama-Macbeth Process to Test CAPM

Here is my understanding of the Fama-Macbeth process: Assuming a group of $n$ stocks, we first collect risk profiles $\beta_{i, agg} = [\beta_{i, MKT}, \beta_{i, SMB}, \beta_{i, HML}]$ through ...
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Optimal asset allocation in three-asset portfolio [closed]

I apologize if similar question has been already asked. I have to find optimal weights $w_F,_I,_M$ for the assets $F, I, M$ in the portfolio. $E(r_F) = 0.03$ $σ_F = 0$ $E(r_I) = 0.2325$ $σ_I = 0....
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102 views

Estimated betas and optimal portfolio

I ran a regression on 20 assets to estimate their beta with different methods. I would like to see the differences of these estimation differences in terms of mean-variance optimal portfolio. How can ...
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577 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 ...
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122 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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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/...
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981 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 ...
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1answer
67 views

Expected Return on Stock

Suppose we have the following information on stocks $X$, $Y$, and $Z$: Expected Returns: $E(R_X)=10\%$, $E(R_Y)=12\%$. Standard Deviations: $\sigma_X=10\%$, $\sigma_Y=15\%$, $\sigma_Z=10\%$ Pairwise ...
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43 views

Gibbons, Ross, Shanken Test derivation by MLE

I Am trying to derive the expression for the GRS test of the CAPM. I am following the book: The Econometrics Of Financial Markets by Campbell, Lo, McKinley (1997). Define $Z_t$ as an $N×1$ vector of ...
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Why is the CAPM Beta defined this way - Beta hedging

Let's say I have two equity indices X and Y. Assume they are negatively correlated with some leverage. I want to hedge X with Y. I have seen many ways of computing a beta to describes the ...
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120 views

Convert Geometric Direct Alpha PME to Arithmetic Excess IRR (PME Alpha / Implied Private Premium)

As a followup to this old question, Private Equity: Direct Alpha vs Excess IRR, I have a new one. In automating PME calculations, the Direct Alpha (DA) approach is computationally simpler and ...
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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!
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247 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 ...
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384 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 ...
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374 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 ...
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358 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) ...
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2k 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 ...
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1k views

Using alpha to evaluate trading strategy

I have a trading strategy that generates returns $R_{t}$. I want to test the strategy by looking at the alpha: $R_t - R_{f,t} = \alpha + \beta (R_{m,t} - R_{f,t}) + e_t$ I compare my alpha against ...
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Expected return [closed]

I apologize if similar question has already been asked. I have to calculate expected return on the stocks A & B via CAPM. I know $w_A = 0.2$ & $w_B = 0.8$ (weights computed from given ...
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70 views

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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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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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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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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210 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 ...
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231 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 ...
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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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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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Investors degree of risk aversion in capm model

I am a bit confused about one assumption of the CAPM. My professor said that in the CAPM model all investors share the same utility function and the same degrees of risk aversion. Then as a final ...
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526 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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2k 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 ...
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222 views

Calculate alpha (CAPM) in “cross country-portfolio”

Assume I wanted to compute the alpha (in CAPM sense, i.e. $r_i - r_f = \alpha_i + \beta_i(r_m - r_f) + \epsilon_i$) of a stock. So I take, say, monthly returns of a stock $i$ for 1 year. Subtract the ...
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1answer
49 views

0.0006 r-squared after trying to test whether the intercepts differ significantly. Did I do it wrong?

I am trying to test if the intercepts of two linear regression (CAPM) differ significantly or not. I have 2 fund's monthly return in the same period and regress them on the same market variable (MKT = ...
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70 views

Beta: Cumulative vs. Simple Returns

How would calculating Beta using cumulative returns differ from Beta calculated with monthly returns? Is one more appropriate to use than another? https://en.wikipedia.org/wiki/Beta_(finance)
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Reducing pricing errors (Alpha) in the CAPM with Bitcoin

I have been trying to examine, using the CAPM, if Bitcoin belongs in the market portfolio or not. With 10 industry portfolios from http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library....