Finance School of management Chapter 13: The Capital Asset Pricing model Objective The theory of the CAPM Use of CAPM in benchmarking Using capm to determine correct rate for uesTc dis nting
1 Finance School of Management Chapter 13: The Capital Asset Pricing Model Objective •The Theory of the CAPM •Use of CAPM in benchmarking • Using CAPM to determine correct rate for discounting
Finance School of management Chapter 13 Contents 13. 1 The Capital Asset Pricing Model in Brief 13.2 Determining the risk Premium on the Market portfolio 13. 3 Beta and risk Premiums on Individual Securities 13.4 Using the CaPM in Portfolio Selection 13.5 Valuation regulating Rates of return uesTc
2 Finance School of Management Chapter 13 Contents 13.1 The Capital Asset Pricing Model in Brief 13.2 Determining the Risk Premium on the Market Portfolio 13.3 Beta and Risk Premiums on Individual Securities 13.4 Using the CAPM in Portfolio Selection 13.5 Valuation & Regulating Rates of Return
Finance School of management Introduction CAPM is a theory about equilibrium prices in the markets for risky assets It is important because it provides a justification for the widespread practice of passive investing called indexing a way to estimate expected rates of return for use in evaluating stocks and projects uesTc
3 Finance School of Management Introduction u CAPM is a theory about equilibrium prices in the markets for risky assets u It is important because it provides – a justification for the widespread practice of passive investing called indexing – a way to estimate expected rates of return for use in evaluating stocks and projects
Finance School of management The Capital Asset Pricing Model n brief CAPM is an equilibrium theory based on the theory of portfolio selection u The basic question What would risk premiums on securities be n equilibrium if people had the same set of forecasts of expected returns and risks and all chose their portfolios optimally according to the principles of efficient diversifications? uesTc
4 Finance School of Management The Capital Asset Pricing Model in Brief u CAPM is an equilibrium theory based on the theory of portfolio selection u The basic question What would risk premiums on securities be in equilibrium if people had the same set of forecasts of expected returns and risks and all chose their portfolios optimally according to the principles of efficient diversifications?
Finance School of management Assumptions of CAPM Assumption 1(homogeneous in information processing) Investors agree in their forecasts of expected rates of return, standard deviation, and correlations of the risky securities Assumption 2(homogeneous in behavior) Investors generally behave optimally according the theory of portfolio selection uesTc
5 Finance School of Management Assumptions of CAPM u Assumption 1 (homogeneous in information processing) Investors agree in their forecasts of expected rates of return, standard deviation, and correlations of the risky securities u Assumption 2 (homogeneous in behavior) Investors generally behave optimally according the theory of portfolio selection