FINE 441 Lecture Notes - Lecture 11: Capital Asset Pricing Model, Capital Market, Market Price

• School: McGill University
• Department: Finance
• Course: FINE 441
• Professor: Larbi Hammami

Document Summary

Problems from chapter 7 : 1 to 8,10 to 19,21,24,25,27 to 35. Chapter 8 : 1 to 17,23,25: capital asset pricing model, development of the capital market model-cml. Rational mean variance investors optimizers ( more return is preferred to less, less risk is preferred to more) Perfect capital market :riskless borrowing and lending, no taxes and transaction costs, Information is costless and available to all investors. Inclusion of a risk-free asset (f) allows identification of the capital market line. The risk-free asset is assumed to have zero standard deviation ( f = 0) and hence zero covariance with the market: any combination of the risk-free asset and another asset m forms a straight line since: E (rp ) = wf r f + w me (r m) 2 + 2 w f w m fm + wm. = wf (0) + 2 wf wm (0) + wm 2 m.