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Résumé de l'exposé
The assumptions about the target="_blank" title="Études et analyses concernant capital">capital market theory expands on to that of the Markowitz portfolio model, and includes consideration of the risk-free rate of return. The correlation and covariance of any asset with a risk-free asset is zero, so that any combination of an asset or portfolio with the risk-free asset generates a linear return and risk function. Therefore, when you combine the risk-free asset with any risky asset on the Markowitz efficient frontier, you derive a set of straight-line portfolio possibilities. The dominant line is the one that is tangential to the efficient frontier. This dominant line is referred to as the capital market line (CML), and all investors should target points along this line depending on their risk preferences. Since all investors want to invest in the risky portfolio, this portfolio, referred to as the market portfolio, must contain all risky assets in proportion to their relative market values. Moreover, the investment decision and the financing decision can be separate because, although everyone will want to invest in the market portfolio, investors will make different financing decisions about whether to lend or borrow based on their individual risk preferences. Given the CML and the dominance of the market portfolio, the relevant risk measure for an individual risky asset is its covariance with the market portfolio, that is, its systematic risk. When this covariance is standardized by the covariance for the market portfolio, we derive the well-known beta measure of systematic risk and a security market line (SML) that relates the expected or required rate of return for an asset to its beta measure.
Sommaire de l'exposé
- target="_blank" title="Études et analyses concernant Arbitrage">Arbitrage Pricing Theory
- The capital Asset Pricing Model: Expected Return and Risk
- Relaxing the Assumptions
- Empirical Tests of the CAPM
- Relationship Between Systematic Risk and Return
- The Market Portfolio : Theory versus Practice
- What is Next
- Summary
Extraits de l'exposé
[...] Hence, the only difference between the alternative portfolios is the proportion of the risky asset portfolio in the total portfolio. To attain a higher expected return than is available at point M (in exchange for accepting higher risk) you can either invest along the efficient frontier beyond point such as point or, add leverage to the portfolio by borrowing money at the risk-free rate and investing in the risky portfolio at point M The Market Portfolio: Because portfolio M lies at the point of tangency, it has the highest portfolio possibility line Everybody will want to invest in Portfolio M and borrow or lend to be somewhere on the CML Therefore this portfolio must include ALL RISKY ASSETS Because the market is in equilibrium, all assets are included in this portfolio in proportion to their market value Because it contains all risky assets, it is a completely diversified portfolio, which means that all the unique risk of individual assets (unsystematic risk) is diversified away Systematic Risk : Only systematic risk remains in the market portfolio. [...]
[...] If the alpha is zero, the stock is on the SML and is properly valued in line with its systematic risk. Calculating Systematic Risk: The Characteristic Line : The systematic risk input for an individual asset is derived from a regression model, referred to as the asset's characteristic line with the market portfolio: R it = a i + b i R Mi + The characteristic line (Equation 8.7 ) is the regression line of best fit through a scatter plot of rates of return for the individual risky asset and for the market portfolio of risky assets over some designated past period. [...]
[...] Diversification reduces overall SD but doesn't eliminate variability. You eventually go down to a world systematic risk level. The CML and the Separation Theorem : The CML leads all investors to invest in the M portfolio. Individual investors should differ in position on the CML depending on risk preferences. How an investor gets to a point on the CML is based on financing decisions. Risk adverse investors will lend part of the portfolio at the risk-free rate and invest the remainder in the market portfolio. [...]
[...] A completely diversified portfolio would have a correlation with the market portfolio of + 1.00 Diversification and the elimination of unsystematic risk : The purpose of diversification is to reduce the standard deviation of the total portfolio. This assumes that imperfect correlations exist among securities. As you add securities, you expect the average covariance for the portfolio to decline. How many securities must you add to obtain a completely diversified portfolio? Observe what happens as you increase the sample size of the portfolio by adding securities that have some positive correlation. There is a large initial impact, wherein the major benefits of diversification were achieved rather quickly. [...]
[...] Investors preferring more risk might borrow funds at the RFR and invest everything in the market portfolio. The decision of both investors is to invest in portfolio M along the CML (the investment decision). The decision to borrow or lend to obtain a point on the CML is a separate decision based on risk preferences (financing decision). Tobin refers to this separation of the investment decision from the financing decision, the separation theorem A Risk Measure for the CML : Covariance with the M portfolio is the systematic risk of an asset. [...]
À propos de l'auteur
Omar J.étudiant Finance- Niveau
- Expert
- Etude suivie
- finance
- Ecole, université
- INSEEC
Descriptif de l'exposé
- Date de publication
- 2008-04-12
- Date de mise à jour
- 2008-04-12
- Langue
- anglais
- Format
- pdf
- Type
- dissertation
- Nombre de pages
- 8 pages
- Niveau
- expert
- Téléchargé
- 3 fois
- Validé par
- le comité de lecture
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