Transcription of 1 Capital Asset Pricing Model (CAPM)
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1 Capital Asset Pricing Model (CAPM)
Copyrightc 2005 by Karl Sigman1 Capital Asset Pricing Model (CAPM)We now assume an idealized framework for an open market place, where all the risky assetsrefer to (say) all the tradeable stocks available to all. In addition we have a risk-free Asset (forborrowing and/or lending in unlimited quantities) with interest raterf. We assume that allinformation is available to all such as covariances, variances, mean rates of return of stocksand so on. We also assume that everyone is a risk-averse rational investor who uses the samefinancial engineering mean-variance portfolio theory from Markowitz.
the efficient frontier for investments. It tells us the expected return of any efficient portfolio, in terms of its standard deviation, and does so by use of …
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