ADM 2350 Lecture Notes - Lecture 8: Risk-Free Interest Rate, S&P 500 Index, Capital Asset Pricing Model

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Chapter 7: return and risk (sd measures risk) e. g, average risk of returns 5%,6%,7% = (5 + 6 + 7) /3 = 6% Beta a = beta for stock a (ra - ref) / beta a = (rm - rrf) / beta m. ****capm: return a = risk free rate + beta a * (return on market - return risk free assets)**** > if s&p 500 goes up by 3%, beta tells you that your return goes up by beta i of 3& > high beta = high return e. g, beta a = 1. 2. Brf = 0 return a = 18% risk free rate = 0. 07 weights must add to 100% (e. g, 25 and 75) Beta for the portfolio = wi * brf + w2 * ba e. g, for 25% invested in a, 75% in risk-free asset: p = 0. 25 1. 2+ 0. 75 0 = 0. 3.

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