ACTSC371 Chapter Notes - Chapter 7: Capital Asset Pricing Model, Market Portfolio, Capital Asset
20 Jan 2016
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Document Summary
The capital asset pricing model (capm) is a set of predictions concerning equilibrium expected returns on risky assets. All investors optimized their portfolios la markowitz. A key insight of the capm is this: Because the market portfolio is the aggregation of all of these identical risky portfolios, it too will have the same weights. Therefore, if all investors choose the same risky portfolio, it must be the market portfolio , that is, the value-weighted portfolio of all assets in the investable universe. Therefore, the capital allocation line based on each investor"s optimal risky portfolio will in fact also be the capital market line, as depicted in figure 7. 1, panel b. This implication will allow us to say much about the risk return tradeoff. Market portfolio the proportion of each stock in this portfolio equals the market value of the stock (price per share times number of shares outstanding) divided by the sum of the market value of all stocks.
