FIN 521 Lecture Notes - Observational Error, Stochastic Process, Perfect Competition
Document Summary
Chapter 7: asset pricing models: capm and apt. The capital asset pricing model (capm) will allow you to determine the required return for any risky asset. Assumptions of the capital market theory: all investors are markowitz-efficient in that they seek to invest in tangent points on the efficient frontier. This means we begin with all investments properly priced in line with their risk levels. Risk-free asset: an asset with zero variance (such asset would have zero correlation with all other risky assets and would provide the risk-free return (rfr) Covariance with a risk-free asset= recall that the covariance between two sets of returns is: Correlation between any risky asset i, and the risk-free asset, rf, would be zero because it is equal to: Combining a risk-free asset with a risky portfolio: expected return, where: = the proportion of the portfolio invested in the risk-free asset.
