MGT 200 Lecture Notes - Lecture 10: Risk-Free Interest Rate, Market Portfolio, Risk Premium
Document Summary
Capm predicts the relationship between the risk of an asset and its expected return. Assume alpha is zero no firm specific risk, so we have to have systematic risk. All investors choose to hold the market portfolio of all assets in the universe. Proportion of ach stock in the portfolio = mv of stock / total mv of all stocks. Market portfolio is on the efficient frontier as the optimal risky portfolio (tangency point on the cal line) The line through the rf rate to the market portfolio (cml) is also optimal) The risk premium on assets will proportional to market portfolio rp and beta (how returns respond relative to the market) Everyone holds the same risky portfolio cal line becomes the capital market line. Mutual fund theorem- only one mutual fund of risky assets, market index fund, can satisfy investment demands of all investors.