RSM332H1 Lecture Notes - Lecture 9: Market Portfolio, Capital Asset Pricing Model, Expected Return
Document Summary
How to measure risk? (quantification for any asset) Market portfolio is the aggregate portfolio of everyone"s portfolio. Market portfolio in capm: we only use inputs (expected returns and covariances, find out optimal portfolios this depends on preferences. When you aggregate, total borrowing = total amount of lending. Tangency portfolio is the market portfolio because everyone"s portfolio is combination of portfolios. Capm ra = rf + risk (beta * risk premium) Capm is the straight line (security market line) Difference for cal is that it is in terms of beta (systematic risk), and the cal line is just the potential choices one can make. On the other hand, sml is dealing with equilibrium state of market. E[r] = rf + b[e[rm] rf] slope b = e(rm) rf. If capm is right, whatever is on beta, we can find the expected return. The variance (volatility) is only a quarter of the variance of the market return.
