2006CMATopic3CapitalAssetPricingModel.ppt

1、1,Capital Markets Analysis,Week 5: Capital Asset Pricing Model,2,Preview,Standard Capital Asset Pricing Model,Assumptions,Summary of implications,Beta,Security market line,Sample exam questions,Review,The CAPM and Securities Analysis,Problems,Seminar Topics for Groups 1E and 2E,3,Preview,Asset alloc

2、ation 1 (Capital allocation),Asset allocation 2 (Risky portfolio),4,Perfect competition,One period time horizon,Investments comprise only publicly-traded financial assets including risk-free loans,No taxes on returns or transaction costs,Rational behaviour,Homogeneous expectations,The Standard CAPM

3、Model - assumptions -,5,Case 2,Theory (standard case),Case 3,Case 4,Theory is (almost) never wrong,But it may be irrelevant, inapplicable, out-of-date,6,The Standard CAPM Model - summary of implications -,The capital market line (CML), the line from the risk-free asset through the market portfolio (

4、M), is also the best attainable CAL,The risk premium on the market portfolio is proportional to its risk and the degree of risk of the representative investor,The risk premium on individual assets is proportional to the risk premium on the market portfolio (M) and the beta coefficient of the securit

5、y relative to the market portfolio,7,8,The Standard CAPM Model - implications: capital market line (CML) -,E(r),E(rM),rf,CML,M,The efficient portfolio is the market portfolio!,M,9,E(rM) rf = 0.01 x M2,The Standard CAPM Model - implications: risk premium on market portfolio -,For each individual inve

6、stor:,y =,E(rM) - rf,0.01 x AM2,For all investors, y = 1,10,The Standard CAPM Model - implications: risk premium on individual securities -,Contribution = w1(Cov(rGM,r1) + w2(Cov(rGM,r2) + wGM(Cov(rGM,r3) + w4(Cov(rGM,r4),= wkCov(r1,rk) = wGMCov(rGM,rM),Cov(r1,r1),w1Cov(r1,rM),11,The Standard CAPM M

7、odel - implications: risk premium on individual securities -,Reward to-risk ratio for investments in GM stock can be expressed as:,GMs contribution to risk premium,GMs contribution to variance,=,wGME(rGM) rf,wGMCov(rGM,rM),=,E(rGM) rf,Cov(rGM,rM),Reward to-risk ratio for investments in the market po

8、rtfolio is:,Market risk premium,Market variance,=,E(rM) rf,M2,In equilibrium, all investments should offer the same reward-to-risk ratio,=,E(rM) rf,M2,E(rGM) rf,Cov(rGM,rM),=,E(rGM) rf,Cov(rGM,rM),M2,E(rM) rf,= rf + GME(rM) rf,Cov(rGM,rM),= rf +,M2,E(rM) rf,E(rGM),12,The Standard CAPM Model - beta -

9、,Market Portfolio,Individuals Portfolio,13,The Standard CAPM Model - implications -,Beta measures the extent to which returns on an individual stock and the market move together,The risk premium on individual securities is equal to the beta of the security multiplied by the risk premium of the marke

10、t portfolio,= iE(rM) rf,14,The Standard CAPM Model - the security market line -,rf,15,The Standard CAPM Model - the CML and the SML -,CML,SML,Graphical Supports,Risk premiums of efficient portfolios,As a function of portfolio ,Risk premiums of individual assets,As a function of asset risk (),16,The

11、Standard CAPM Model - CAPM and securities analysis -,E(r),SML,rf,E(rM),M = 1.0,17,The Standard CAPM Model - problems -,Q1.What is the beta of a portfolio with E(rp) = 18% if rf = 6% and E(rM) = 14%?, = E(rp) rf / R(rM) rf, = 18 6 / 14 6, = 12 / 8,1.5, = 1.5,A1.,18,The Standard CAPM Model - problems

12、-,Q2.Initial Situation: The market price of a security is $50. Its expected rate of return is 14%. The stock is expected to pay a constant dividend in perpetuity. The risk-free rate is 6% and the market risk premium is 8.5%. Disturbance: The correlation coefficient with the market portfolio doubles

13、(and all other variables remain unchanged). Question: What will be the market price of the security in the new situation?,A2.Initial Situation:,Dividend = Price x Rate of return = $50 x 0.14 = $7,E(rM) = Risk-free rate + Market risk premium = 6% + 8.5% = 14.5%,S = E(rS) rf / E(rM) rf = (14 6) / (14.

14、5 6) = 8 / 8.5 = 0.941,19,The Standard CAPM Model - problems -,A2.New Situation:,Beta. The doubling of the correlation coefficient of the security with the market also doubles the covariance of the security with the market and therefore doubles Beta, to 1.882,E(rS) = rf + SE(rM) rf = 6 + (1.882 x 8.

15、5) = 22%,PS = Dividend / E(rS) = $7 / 0.22 = $31.80,1.8,20,Sample Exam Questions,Questions 3 12 on pages 305-06 of text book (BKM, Investments),21,Seminar in Week 7 - Group 1E and Group 2E -,1. Concept Check Question 1, BKM p609,2. Concept Check Question 2, BKM p614,3. Question 2, BKM p644. Explain your answers.,4. Question 3, BKM p644,5. Ask and answer one other question on Equity valuation,Two members of the group should addres