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MODEL
Presented By:-
Karishma Indorewalla
Neha Jain
Vijayendra Rao
Road Map
Capital
Market
Line
(CML)
Security
Market
Line (SML)
- Capital Market Line
Linear risk-return trade-off for all investment portfolios
Combination of Market Portfolio and Risk-free asset
Where
E (r_c) = the expected return on portfolio ‘c’
r (f) = the risk-free rate
Stdev (c) = the standard deviation of portfolio ‘c’
E (r_m) = the expected return on the market portfolio ‘m’
Stdev (m) = the standard deviation of the market portfolio ‘m’
Cont…
-Capital Market Line (contd.)
Tangent line to the efficient frontier that passes through the risk-free rate on
the expected return axis.
- Security Market Line
Similar to CML but for individual securities
Systematic risk and unsystematic risk
Only systematic risk has a favorable influence on E (Ri) – expected return
Portfolio Risk And CAPM
βp = ∑i=1 to n wi * βi
Assessing Portfolio Performance
- Portfolio Characteristics
Performance must always be viewed in relative to an appropriate benchmark
performance of a portfolio
performance
- Alpha And Beta
Alpha
Measure of performance on a risk-adjusted basis
Abnormal return measured from CAPM required return
One of five technical risk ratios
If alpha>0 : Positive risk adjusted performance
If alpha<0 : Underperformance of Portfolio
Beta
Variance of returns is not an adequate measure of risk when the returns are
not normally distributed
Cont…
Is CAPM testable?
Model tested in 2 ways:-
- Normative
- Positive
theory says that the only reason an investor should earn more, on average, by
investing in one stock rather than another is that one stock is riskier.
The capital asset pricing model is by no means a perfect theory. But the spirit of
determine what return they deserve for putting their money at risk.
Thank You…!!!