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CAPM: Implications

CAPM: Implications. Expected excess returns are proportional to beta. Beta of a portfolio = weighted sum of betas of components. Portfolio Beta Example. r i (t ) = beta i * r m (t ) + alpha i. CAPM Market Risk: Example. r i (t ) = beta i * r m (t ) + alpha i.

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CAPM: Implications

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  1. CAPM: Implications • Expected excess returns are proportional to beta. • Beta of a portfolio = weighted sum of betas of components.

  2. Portfolio Beta Example • ri(t) = betai * rm(t) + alphai

  3. CAPM Market Risk: Example • ri(t) = betai * rm(t) + alphai

  4. CAPM Market Risk: Example • ri(t) = betai * rm(t) + alphai

  5. CAPM Market Risk: Long & Short • ri(t) = betai * rm(t) + alphai

  6. Summary: • Understand assumptions of the CAPM. • Understand implications of the CAPM. • Reading: Grinold & Kahn, • chapter 2

  7. Beta & Correlation with Market

  8. CAPM: Expected Residual = 0 • CAPM: • ri(t) = betai * rm(t) + alphai • ri(t) = betai * rm(t) + random • Active Portfolio Management View • ri(t) = betai * rm(t) + alphai

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