FINC3017 : Topic-4-Capital-Asset-Pricing-Model
Document Summary
Introduction to the capm: derivation of the capm. The security market line: using the capm, empirical tests of the capm. The capm is a set of predictions concerning equilibrium expected returns on risky assets. The model was set out in articles by sharpe, lintner and mossin 12yrs after markowitz established modern portfolio theory. The assumptions of the basic capm try to ensure that individuals are as alike as possible, with exceptions including initial wealth and risk aversion. They include: the market consists of many investors with small levels of initial wealth compared with the total level of wealth. Perfect competition": all investors plan for a single holding period of identical length, investments are limited to a universe of publically traded financial assets and risk-free borrowing and lending. The model does not account for investment in non-traded assets such as human capital.
