Quantitative Finance Stack Exchange
Quantitative Finance 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.

The CAPM or capital asset pricing model was been mainly introduced by Sharpe (1964) and Lintner (1965) independently on the base of the Markowitz's (1956) research.

It is a model that allows to price an individual financial asset or portfolio that states the expected financial asset returns $E(R_i)$ is given by:

$E(R_i)$ = $R_f$ + $\beta_i*{(E(R_m)-R_f)}$

where:

  • $R_f$ is the risk-free rate of interest such as interest arising from government bonds;
  • $(E(R_m)-R_f)$ is the defined as the market premium;
  • $\beta_i$ is the sensitivity of the expected excess asset returns to the expected excess market returns, and, it is given by $\beta_i$ = ${COV(R_i;R_m)}\over VAR(R_m)$;
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CAPM - Beta of zero and its implications on diversification

I don't know if this is the right forum in which to ask this question, but here goes. I'm working through Luenberger's Investment Science. The form of CAPM model given in the book is $$\bar{r}_i - r_f = \beta_i (\bar{r}_M - r_f)$$ It says that if…
user327301
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CAPM, DCF, and Jensen's inequality

One way to value a cashflow is to first calculate the expected return from CAPM, and then use the expected return to discount the future cashflows. The problem here is that the expected return from CAPM is an average $\mathrm{E}[R]$, and therefore,…
Tom Bennett
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What are the implication of a negative risk-free rate on SML?

What happens to the Security market line (within the CAPM model) when the risk-free rate turns negative?
user9502
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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
Klapaucius
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Excess, Residual and Active Return

in CAPM. What's the difference between these different types of returns? Active return Excess return Residual return
Josh
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Is CAPM a failure?

CAPM says that in order to generate high returns I need to take more systemic risk. But the ex-post results do not seem to validate this theory. There is a ETF SPHB - PowerShares S&P 500 High Beta ETF (SPHB). If I compare this to plain SPY, I…
George Coder
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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-free asset. So is it all as simple as saying…
Ahehaie
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Does the CAPM use the single index model?

When we derive the CAPM (i.e. find equations for the capital market line and the security market line), we nowhere assume that the individual security return is linearly dependent on the marker return (i.e. the single index model) However, when we…
Dhruv Gupta
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Expected return

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 prices and quantities) $β_A = 1.2$. I have calculated also $β_B…
Svit
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Optimal asset allocation in three-asset portfolio

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. $E(r_F) = 0.03$ $σ_F = 0$ $E(r_I) = 0.2325$ $σ_I = 0.5$ $E(r_M) = 0.12$ $σ_M = 0.2$ $ρ_I,_M = 0.9$ After…
Svit
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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 is due to market risk and how do I interpret…
Edward Choi
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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) or do they always have to be equal? And what if I…
Lumberjack88
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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?
Victor123
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Deriving the CAPM from the CML

In the paper "A Simple Derivation of the Capital Asset Pricing Model from the Capital Market Line" the authors reason: Given the CML $$R_p = R_f +\frac{R_m - R_f}{\sigma_m}\sigma_p$$ where: $R_p$ is the return on an efficient portfolio $R_f$ is the…
Beginner
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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 consequence all investors will choose a portfolio…
Jacopo Di Michele
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