BU473 Chapter 7: Chapter 7
Document Summary
Developing a capital market line: combining a risk-free asset with a risky portfolio, m, expected return = the weighted average of the 2 assets, standard deviation = applying the 2-asset standard deviation formula: Zero correlation with all other risky assets: an asset with zero standard deviation, provides the risk-free rate of return, will lie on the vertical axis of a portfolio graph. Systematic risk: only systematic risk remains in the market portfolio. Firm-specific risk: growth of money supply variability (macroeconomic) Interest rate volatility: variability in factors like: The existence of risk-free asset resulted in deriving the capital market line that became the relevant frontier: cml cannot be used to measure the expected return on an individual asset. The relevant risk measure = asset"s covariance with the market portfolio. Applying the cml using this relevant risk measure: The capm indicates what should be expected or required rates of return on risky assets. The security market line: graphical form of capm.
