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Chapter 10 Return and Risk: The Capital-Asset-Pricing Model CAPM

Expected (Ex Ante) Return, Variance, and Covariance. Expected Return: E(R) = S (ps x Rs)Variance: s2 = S {ps x [Rs - E(R)]2}Standard Deviation = sCovariance: sAB = S {ps x [Rs,A - E(RA)] x [Rs,B - E(RB)]}Correlation Coefficient: rAB = sAB / (sA sB). Return and Risk for Portfolios (2 Ass

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Chapter 10 Return and Risk: The Capital-Asset-Pricing Model CAPM

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    1. Chapter 10 Return and Risk: The Capital-Asset-Pricing Model (CAPM) 10.1 Individual Securities 10.2 Expected Return, Variance, and Covariance 10.3 The Return and Risk for Portfolios 10.4 The Efficient Set for Two Assets 10.5 The Efficient Set for Many Securities 10.6 Diversification: An Example 10.7 Riskless Borrowing and Lending 10.8 Market Equilibrium 10.9 Relationship between Risk and Expected Return (CAPM) 10.10 Summary and Conclusions Appendix 10A: Is Beta Dead?

    2. Expected (Ex Ante) Return, Variance, and Covariance Expected Return: E(R) = S (ps x Rs) Variance: s2 = S {ps x [Rs - E(R)]2} Standard Deviation = s Covariance: sAB = S {ps x [Rs,A - E(RA)] x [Rs,B - E(RB)]} Correlation Coefficient: rAB = sAB / (sA sB)

    3. Return and Risk for Portfolios (2 Assets) Expected Return of a Portfolio: E(Rp) = XAE(R)A + XB E(R)B Variance of a Portfolio: sp2 = XA2sA2 + XB2sB2 + 2 XA XB sAB

    4. An Example of Portfolio Return and Risk Stock Investment Xi E.(Ri) si2 IBM $5000 50% 0.09 0.01 HM $5000 50% 0.13 0.04 Total $10000 100% sIBM,HM = 0 E[Rp] = (0.5)(0.09) + (0.5)(0.13) = 11% sp2 =(.5)2(.01) + (.5)2(.04) + 2(.5)(.5)(0) = 0.0125 sp = (0.0125)(1/2) = 0.1118

    5. Efficient Sets and Diversification

    6. Capital Market Line

    7. Security Market Line

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