BUS 312 Chapter Notes - Chapter 8: Capital Asset Pricing Model, Arbitrage Pricing Theory, Risk Premium

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 312
• Professor: Martin Thorsten

Document Summary

Risk premium = expected return risk-free rate (interest rate) 8 portfolio theory and the capital asset pricing model. Efficient portfolios = offer highest expected return for any level of risk. Expected return (r) = (amount invested * expected return on portfolio) + (amount lent * interest rate) Sharpe ratio = ratio of risk premium to standard deviation. Each investor should put money into 2 investments: 1 risky portfolio and 1 risk-free loan (either borrowing or lending) Treasury bills unaffected by what happens to the market. Market risk premium = diff b/t return on market & interest rate = rm rf. Capital asset pricing model (capm) = expected risk varies in direct proportion to beta. Expected risk premium on stock = beta * expected risk premium on market. When 2 companies merge to spread risk, their stock prices do not increase. Actual stock returns reflect expectations but also embody a lot of noise.