CAPM

Question 1

CAPM Beta

Answer 1

Slope of a line plotted through a stocks value against the markets value

Gauges volatility

Question 2

CAPM Alpha

Answer 2

Y intercept of a line plotted through a stocks value against the markets value

Question 3

CAPM World View

Answer 3

Backward Looking risk ratio (looks at past performance)

Question 4

Passive investing and CAPM

Answer 4

CAPM states alpha is random, and its expected value is 0

Question 5

Active investing and CAPM

Answer 5

Active managers believe they can predict alpha

Question 6

CAPM for portfolios

Answer 6

Compute CAPM for stock, multiply by weight, and sum results across portfolio

Question 7

Passive CAPM Portfolio formula

Answer 7

Portfolio Beta is a weighted sum of the individual betas for each of the stocks, alpha is 0

Question 8

Active CAPM Portfolio formula

Answer 8

Portfolio Beta is a weighted sum of the individual betas for each of the stocks, alpha is the weighted sum of the individual alphas

Question 9

CAPM Implications

Answer 9

In order to beat the market-
You need high beta in up market, low beta in down market

Problematic because of efficient market hypothesis

Question 10

Efficient Market Hypothesis

Answer 10

States you cant predict the market, meaning you cant predict Beta