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Testing & Implementing Portfolio Theory by Prof. Thomas Chemmanur

Learn about testing the CAPM with cross-sectional regressions and implementing portfolio theory in practice using historical data for assets. Understand covariance, correlation, and more.

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Testing & Implementing Portfolio Theory by Prof. Thomas Chemmanur

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  1. CAPM Testing& Implementing Porftolio Theory Professor Thomas Chemmanur

  2. TESTING THE CAPM RUN A CROSS-SECTIONAL REGRESSION: ACROSS STOCKS, IN A GIVEN PERIOD. IF THE CAPM HOLDS, WE SHOULD GET: THEORETICAL (CAPM) LINE ACTUAL (EMPIRICAL) LINE i 2

  3. IMPLEMENTING PORTFOLIO THEORY IN PRACTICE ASSUMING THAT ASSET RETURNS ARE “STATIONARY”, WE CAN USE HISTORICAL DATA; TYPICALLY, USE MONTHLY DATA. N = NUMBER OF ASSETS n = NUMBER OF PERIODS OF DATA AVAILABLE SIMILARLY, WE CAN ESTIMATE THE VARIANCE, 3

  4. IMPLEMENTING PORTFOLIO THEORY IN PRACTICE COVARIANCE, CORRELATION, 4

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