CAPM Flashcards
What is capm
One of the most renowned models if asset pricing
What are the assumptions behind capm
Assets are normally distributed, investor utilities are an increasing function of wealth, everyone agrees about assets stats like asset expected returns variance covariance etc. there is one risk free rate and no transaction costs
How do you maximize utility in a portfolio with one asset and a risk free asset
You choose the ratio with the greatest sharp ratio
What is the CAPM equation
ri-rf = bi*(rm - rf)
The risk premium of an asset is equal to the riskpremium of a market times the beta aka systematic risk of the asset
How is systematic risk estimated
Through historic returns or the returns of similar assets
When is a stock market efficient
When all the available information about an asset is reflected in its price
What is required for a market to be efficient
That all individuals are rational and make optimal decisions based on the information available or that the irrationality is unsystematic and cancels itself out or lastly that the rational investors see an arbitrage opportunity and drive the price right
What is a systematic error
When all individuals are subjected to the same decision error like using past decisions as anchors for new ones or being over confident.
Name some convincing evidence for irrational investors
Market anomalies like momentum in price increases and falls
What is weak form efficiency
When it is impossible to approximate future performance based on the past and therefor technical analysis is unprofitable
What is semi strong efficiency
When all publicly listed information is in the information set
Is fundamental analysis profitable in semi strong efficiency
No because everyone has access to the actions that beat matches the balance sheet
Is insider trading profitable in strong efficiency
No
