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The CAPM, Index Model, and the APt
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From Chapter 7 Powerpoint
Terms in this set (14)
This is a theoretical model of equilibrium ex ante or expected returns on risky assets
The CAPM (Capital asset pricing model)
The market portfolio will be the ______ portfolio to the optimal capital allocation line.
tangency
The capital allocation line (CAL) is also called the _______.
Capital market line, or CML
The risk premium on the market portfolio will be proportional to its risk, and the degree of risk aversion of the representative (average investor). What formula do you use to find the risk premium on the market portfolio?
E(Rm)- Rf= A O^2 m
The contribution of the ______ is to derive the fair price (in terms of the expected return) at which investors are willing to hold each asset in the optimal risky portfolio
CAPM
The ______ is built on insight that the appropriate risk premium on an individual asset will be determined by its contribution to the risk of the investors' overall portfolios
CAPM
The expected return-beta relationship can be portrayed graphically as the _______.
security market line
Many firms use the _____ to obtain a benchmark hurdle rate for capital budgeting decisions
SML
When refering to the CAPM, the _____ strategy is efficient
passive
CAPM implies ___
is the optimal risky portfolio
Fama- French Three- Factor Model
SMB= small minus big (firm size)
HML= high minus low (book-to-market ratio)
______________ is a theory of expected asset returns due to Ross. This theory explicitly accounts for multiple factors.
The Arbitrage Price Theory
The APT requires what three assumptions?
1) Returns can be described by a factor model
2) There are no arbitrage opportunities
3)There are large numbers of securities that permit the formation of portfolios that diversify the firm-specific risk of individual stocks
The APT only holds exactly for _______ portfolios
well-diversified
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