Chapter 9 part 2 CAPm Flashcards Preview

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Flashcards in Chapter 9 part 2 CAPm Deck (5)
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what is capital asset pricing model (CAPM_

a pricing model that uses one factor, market risk, to relate expected returns to risk


The development of CAPM was based on what assumptions

1. all investors have identical expectations about expected returns, SD. and correlation coefficients for all securities
2. all investors have the same one-period time horizon
3. al investors can borrow or lend money at the risk-free rate of return
4. there are no transaction costs
5. there are no personal income taxes, so investors are indifferent whether they receive capital gains or dividends
6. there are many investors, and no single investor can affect the price of a stock through his or her buying and selling decisions. therefore, invvestors are price-takers
7. capital markets are in equilibirium


CML (Capital market line)

is a lien depicting the highest attainable expected return for any given risk level that includes only efficient portfolios; all rational, risk-averse investors want to be on this line


Market price of risk

the incremental expected return divided by the incremental risk
- indicates the additional expected return that the market demands for an increase in risk


required rate of return

the rate of return investors need to tempt them to invest in a security