MGFB10H3 Chapter 9: Chapter 9 Notes

• School: UTSC
• Department: Finance
• Course: MGFB10H3
• Professor: Derek Chau

Document Summary

Chapter 9 the capital asset pricing model (capm) notes. p = [(w)2 (a)2 + (1 w)2 (rf)2 + 2 (1 w) (w) (a, rf) (a) (rf)] = [(w)2 (a)2] = w a. Therefore, investors are price-takers: capital markets are in equilibrium. Sharpe ratio measure of portfolio performance that describes how well an asset"s return compensates investors for risk taken. p = w1 1 + w2 2 + + wn n. i = (ri rf) [i (rm rf)] Summary of learning objectives: describe how the efficient frontier is affected once the possibility of risk-free borrowing and investing is introduced. Once the possibility of risk-free borrowing and investing is introduced, the efficient frontier becomes a straight line. The optimal risky portfolio is the one that is tangent to the efficient frontier on a line that is drawn from rf. This portfolio will be the same for all investors.