6.4 Non-standard forms of CAPM

Question 1

If there are no risk-free assets:

they must all have …

now combine the market portfolio with …

Answer 1

find so called zero-beta portfolio: portfolios that are uncorrelated with market portfolio

the same return

the zero ß portfolio

Question 2

The CAPM remains valid even without a risk-free asset by using a zero ß portfolio instead of a risk-free asset. The core hypothesis is still valid: …

Problem:

Answer 2

price of a risky asset depends linearly on its market risk

model assumes possibility of unlimited short sales

Question 3

Riskless lending and borrowing:

Security Market Line is different depending on lending or borrowing: Only systematic risk is compensated by market: Dashed portions contain unsystematic risk

Answer 3

Different efficient frontiers because of different rates for lending and borrowing

see slide 24

Question 4

Taxes and CAPM

If all security returns are taxed at the same rate T at the end of the planning period,
what will be impact be on the portfolio decision?

However, taxation of savings will have an impact on the saving decision and, hence, on …

In reality, interests, dividends and capital gains are taxed differentially. Hence, pre-
tax returns of securities will depend on dividend policy and the individual portfolio
decision will depend on marginal tax rates (clientele-effect)

Market risk will not be sufficient to determine the equilibrium rate of return of a security (also dividend yield will become relevant)

Answer 4

No impact.

the equilibrium return of the riskless asset

Question 5

Non-marketable assets:

Answer 5

see slide 28