• Capital Asset Pricing Model
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Predictive analytics Risk management
1
The Capital asset pricing model (CAP-M)
"predicts" the best portfolio to maximize
return, Probabilistic Risk Assessment
(PRA)--when combined with mini-Delphi
Techniques and statistical approaches
yields accurate forecasts and RiskAoA is a
stand-alone predictive tool
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Risk management tools - Notable tools (partial)
Capital asset pricing model – Used to
determine the appropriate required rate of
return of an asset, if that asset is added to
an already well diversified portfolio, based
on non-diversifiable risk.
1
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Risk - History
The scientific approach to risk entered
finance in the 1960s with the advent of the
capital asset pricing model and became
increasingly important in the 1980s when
derivative (finance)|financial derivatives
proliferated
1
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Finance - Financial economics
1
Here, the twin assumptions of rational
pricing|rationality and efficientmarket hypothesis|market efficiency
lead to modern portfolio theory (the
Capital asset pricing model|CAPM),
and to the Black–Scholes
model|Black–Scholes theory for
Valuation of options|option valuation;
it further studies phenomena and
models where these assumptions do
not hold, or are extended
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Linear regression - Finance
1
The capital asset pricing model uses linear
regression as well as the concept of Beta
(finance)|beta for analyzing and
quantifying the systematic risk of an
investment. This comes directly from the
beta coefficient of the linear regression
model that relates the return on the
investment to the return on all risky assets.
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List of publications in economics - Capital asset pricing model
1
'Description:' Development of the Capital
asset pricing model used to determine
appropriate prices for assets.
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Technical analysis - Empirical evidence
1
Moreover, for sufficiently high transaction
costs it is found, by estimating Capital
asset pricing model|CAPMs, that technical
trading shows no statistically significant
risk-corrected out-of-sample forecasting
power for almost all of the stock market
indices
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Stock valuation - Fundamental criteria (fair value)
1
The most theoretically sound 'stock valuation
method', called income valuation or the
discounted cash flow ('DCF') method,
involves 'discounting of the profits' (dividends,
earnings, or cash flows) the stock will bring to
the stockholder in the foreseeable future, and
a final value on disposal.William F. Sharpe,
Investments, Prentice-Hall, 1978, pp. 300
et.seq. The discounted rate normally includes
a risk premium which is commonly based on
the capital asset pricing model.
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Financial economics - Models in financial economics
1
The Capital Asset Pricing Model describes
how markets should set the prices of
assets in relation to how risky they are
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Financial portfolio - Description
1
1088-1105 A portfolio's asset allocation
may be managed utilizing any of the
following investment approaches and
principles: equal weighting,
capitalization-weighting, priceweighting, risk parity, the capital asset
pricing model, arbitrage pricing theory,
the Jensens alpha|Jensen Index,
theTreynor ratio|Treynor Index, the
William Forsyth Sharpe|Sharpe diagonal
(or index) model, the value at risk
model, modern portfolio theory and
others.
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Corporate finance - Capitalization structure
The cost of equity (see Capital asset pricing
model|CAPM and arbitrage pricing theory|APT) is
also typically higher than the cost of debt - which
is, additionally, a deductible expense – and so
equity financing may result in an increased hurdle
rate which may offset any reduction in cash flow
risk.See:[
http://www.lawyersclubindia.com/articles/OptimalBalance-of-Financial-Instruments-Long-TermManagement-Market-Volatility-ProposedChanges-3765.asp Optimal Balance of Financial
Instruments: Long-Term Management, Market
Volatility Proposed Changes], Nishant Choudhary,
LL.M
1
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Corporate finance - Investment and project valuation
Aswath Damodaran: [
http://people.stern.nyu.edu/adamodar/
pdfiles/acf3E/presentations/hurdlerate.
pdf Estimating Hurdle Rates] Managers
use models such as the capital asset
pricing model|CAPM or the arbitrage
pricing theory|APT to estimate a
discount rate appropriate for a particular
project, and use the weighted average
cost of capital (WACC) to reflect the
financing mix selected
1
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Eugene Fama - Fama–French three-factor model
In recent years, Fama has become
controversial again, for a series of papers,
co-written with Kenneth French, that cast
doubt on the validity of the Capital asset
pricing model|Capital Asset Pricing Model
(CAPM), which posits that a stock's Beta
(finance)|beta alone should explain its
average return
1
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Capital asset pricing model
1
In finance, the 'capital asset pricing
model' ('CAPM') is used to determine a
theoretically appropriate required rate
of return of an asset, if that asset is to
be added to an already well-diversified
Portfolio (finance)|portfolio, given that
asset's non-Diversification
(finance)|diversifiable risk
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Covariance - In financial economics
Covariances play a key role in financial
economics, especially in Modern portfolio
theory|portfolio theory and in the capital asset
pricing model. Covariances among various
assets' returns are used to determine, under
certain assumptions, the relative amounts of
different assets that investors should (in a
Normative economics|normative analysis) or
are predicted to (in a Positive
economics|positive analysis) choose to hold
in a context of Diversification
(finance)|diversification.
1
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Predictive Analysis - Risk management
The Capital asset pricing model (CAP-M)
predicts the best portfolio to maximize return,
Probabilistic Risk Assessment (PRA)--when
combined with mini-Delphi method|Delphi
Techniques and statistical approaches yields
accurate forecasts and RiskAoA is a standalone predictive
tool.https://acc.dau.mil/CommunityBrowser.as
px?id=126070 These are three examples of
approaches that can extend from project to
market, and from near to long term
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Chartered Financial Analyst - Portfolio management
1
It includes: Modern Portfolio Theory
(efficient frontier, Capital Asset
Pricing Model, etc.); Investment
management|investment practice
(defining the investment policy for
individual—and institutional
investors, resultant asset allocation,
Order (exchange)|order execution);
and
Rate_of_return#Mutual_fund_and_inv
estment_company_returns|measure
ment of investment performance.
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Covariance matrix - In financial economics
The covariance matrix plays a key
role in financial economics,
especially in Modern portfolio
theory|portfolio theory and its mutual
fund separation theorem and in the
capital asset pricing model
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Discounting - Discount rate
1
One method that looks into a correct discount
rate is the capital asset pricing model.
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Mathematical finance - Risk and portfolio management: the P world
1
Next, breakthrough advances were made
with the Capital Asset Pricing Model
(CAPM) and the Arbitrage Pricing Theory
(APT) developed by Treynor (1962),
Mossin (1966), William Forsyth
Sharpe|William Sharpe (1964), Lintner
(1965) and Ross (1976).
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Master of Financial Economics - Structure
Decision theory#Choice under
uncertainty|Choice under uncertainty is
then introduced, and the twin assumptions
of rational pricing|rationality and efficient
markets|market efficiency lead to modern
portfolio theory (the Capital asset pricing
model|CAPM), and to the Black Scholes
theory for Valuation of options|option
pricing
1
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The Theory of Investment Value - Theory
Today, “evaluation by the rule of present
worth”, applied in conjunction with an
Capital asset pricing model#Asset-specific
required return|asset appropriate discount
rate mdash; usually derived using the capital
asset pricing model of modern portfolio
theory (Harry Markowitz and William Forsyth
Sharpe|William Sharpe), or the arbitrage
pricing theory (Stephen Ross
(economist)|Stephen Ross) mdash; is
probably the most widely used stock
valuation method amongst institutional
investors;http://www.investopedia.com/artic
les/03/011403.asp see List of finance
topics#Discounted
cash flow valuation|List
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of valuation topics
1
Rational pricing - Pricing shares
1
The capital asset pricing model (CAPM) is
an earlier, (more) influential theory on
asset pricing. Although based on different
assumptions, the CAPM can, in some
ways, be considered a special case of the
APT; specifically, the CAPM's security
market line represents a single-factor
model of the asset price, where beta is
exposure to changes in value of the
market.
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Business valuation - Capital Asset Pricing Model (CAPM)
1
The Capital Asset Pricing Model|CAPM
method derives the discount rate by
adding a risk premium to the risk-free rate
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Business valuation - Capital Asset Pricing Model (CAPM)
1
Where private companies can be
shown to be sufficiently similar to
public companies, however, the
Capital Asset Pricing Model|CAPM
method may be appropriate.
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Business valuation - Modified Capital Asset Pricing Model
1
The Cost of Equity (Ke) is computed by using the
Modified Capital Asset Pricing Model (Mod. CAPM)
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Business valuation - Weighted average cost of capital (WACC)
The rationale behind this choice is
that this earnings basis corresponds
to the equity discount rate derived
from the Build-Up or Capital Asset
Pricing Model|CAPM models: the
returns obtained from investments in
publicly traded companies can easily
be represented in terms of net cash
flows
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Investment management - Risk-adjusted performance measurement
1
The Capital Asset Pricing Model (CAPM)
developed by Sharpe (1964) highlighted
the notion of rewarding risk and produced
the first performance indicators, be they
risk-adjusted ratios (Sharpe ratio,
information ratio) or differential returns
compared to benchmarks (alphas)
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Investment management - Risk-adjusted performance measurement
1
Multi-factor models were developed as an
alternative to the Capital asset pricing
model|CAPM, allowing a better description
of portfolio risks and a more accurate
evaluation of a portfolio's performance
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Working capital management - Capitalization structure
1
The cost of equity (see Capital asset pricing
model|CAPM and arbitrage pricing
theory|APT) is also typically higher than the
cost of debt - which is, additionally, a
deductible expense – and so equity financing
may result in an increased hurdle rate which
may offset any reduction in cash flow
risk.See:[http://www.lawyersclubindia.com/
articles/Optimal-Balance-of-FinancialInstruments-Long-Term-ManagementMarket-Volatility-Proposed-Changes3765.asp Optimal Balance of Financial
Instruments: Long-Term Management,
Market Volatility Proposed Changes],
Nishant https://store.theartofservice.com/the-capital-asset-pricing-model-toolkit.html
Choudhary, LL.M
Working capital management - Investment and project valuation
Aswath Damodaran:
[http://people.stern.nyu.edu/adamodar/pdfi
les/acf3E/presentations/hurdlerate.pdf
Estimating Hurdle Rates] Managers use
models such as the capital asset pricing
model|CAPM or the arbitrage pricing
theory|APT to estimate a discount rate
appropriate for a particular project, and
use the weighted average cost of capital
(WACC) to reflect the financing mix
selected
1
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Capital budgeting - Capital Budgeting Definition
1
Managers may use models such as the
capital asset pricing model|CAPM or
the arbitrage pricing theory|APT to
estimate a discount rate appropriate
for each particular project, and use
the weighted average cost of capital
(WACC) to reflect the financing mix
selected
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Modern portfolio theory - Comparison with arbitrage pricing theory
The Security Market Line and capital
asset pricing model are often
contrasted with the arbitrage pricing
theory (APT), which holds that the
expected return of a financial asset can
be modeled as a linear function of
various Macroeconomics|macroeconomic factors, where sensitivity to
changes in each factor is represented
by a factor specific beta coefficient.
1
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Real options valuation - Applicability of standard techniques
Under this “standard” NPV approach,
future expected cash flows are present
valued under the
Mathematical_finance#Risk_and_portfolio
_management:_the_P_world|empirical
probability measure at a discount rate that
reflects the embedded risk in the project;
see Capital asset pricing model|CAPM,
Arbitrage pricing theory|APT, Weighted
average cost of capital|WACC
1
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Real options valuation - Technical considerations
1
Under ROV, however: (a) managements'
actions actually change the risk
characteristics of the project in question,
and hence (b) the Required rate of return
could differ depending on what state was
realised, and a Capital asset pricing
model#Asset-specific required
return|premium over risk free would be
required, invalidating (technically) the risk
neutrality assumption.
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Non-convexity (economics) - Optimization over time
1
Merton used dynamic programming in his
1973 article on the ICAPM|intertemporal
capital asset pricing model
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Fundamental analysis - Two analytical models
The choice of stock analysis is
determined by the investor's belief in
the different paradigms for how the
stock market works. See the
discussions at efficient-market
hypothesis, random walk hypothesis,
capital asset pricing model, Fed model
Theory of Equity Valuation, marketbased valuation, and behavioral
finance.
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Financial statement analysis
1
Unlike other ratios, return on capital has
a theoretical benchmark, the cost of
capital - also called the required return
on capital. For example, the return on
equity, ROE, could be compared with the
required return on equity, kE, as
estimated, for example, by the capital
asset pricing model. If ROE WACC,
where WACC is the weighted average
cost of capital), then the firm is
economically profitable at any given
time over the period of ratio analysis.
The firm creates values for its owners.
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Working capital management - Capitalization structure
1
The cost of equity (see Capital asset pricing
model|CAPM and arbitrage pricing theory|APT)
is also typically higher than the cost of debt which is, additionally, a deductible expense –
and so equity financing may result in an
increased hurdle rate which may offset any
reduction in cash flow
risk.See:[http://www.lawyersclubindia.com/arti
cles/Optimal-Balance-of-Financial-InstrumentsLong-Term-Management-Market-VolatilityProposed-Changes-3765.asp Optimal Balance
of Financial Instruments: Long-Term
Management, Market Volatility Proposed
Changes], Nishant Choudhary, LL.M
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Michael Jensen - Research
1
Prof. Jensen has played an important role
in the academic discussion of the capital
asset pricing model, of stock options
policy, and of corporate governance,
developing a method of measuring fund
manager performance, the so-called
Jensen's alpha.
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NHH - 1963ndash;1980: A new campus and rapid growth
1
During this time Professor Jan Mossin's
seminal paper Equilibrium in a Capital
Asset Market was published in
Econometrica, contributing significantly to
the development of the Capital Asset
Pricing Model (CAPM)
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Residual income valuation - Calculation of residual income
1
The cost of equity is typically calculated
using the Capital Asset Pricing
Model|CAPM, although other approaches
such as arbitrage pricing theory|APT are
also used. The currency charge to be
subtracted is then simply
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Cost of capital - Summary
It is commonly equated using the
capital asset pricing model formula
(below), although articles such as
Stulz 1995 question the validity of
using a local CAPM versus an
international CAPM- also considering
whether markets are fully integrated
or segmented (if fully integrated,
there would be no need for a local
CAPM).
1
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Cost of capital - Cost of equity
An alternative to the estimation of the
required return by the capital asset pricing
model as above, is the use of the Fama–
French three-factor model.
1
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Diversification (finance) - Maximum diversification
1
The earliest definition comes from the
capital asset pricing model which
argues the maximum diversification
comes from buying a pro rata share of
all available assets. This is the idea
underlying index funds. However,
since this strategy typically involves
swapping systematic diversification for
idiosyncratic diversification, it has little
credibility as a diversification strategy.
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Diversification (finance) - Diversifiable and non-diversifiable risk
The Capital Asset Pricing Model
introduced the concepts of diversifiable
and non-diversifiable risk. Synonyms for
diversifiable risk are idiosyncratic risk,
unsystematic risk, and security-specific
risk. Synonyms for non-diversifiable risk
are systematic risk, beta (finance)|beta
risk and market risk.
1
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Diversification (finance) - Diversifiable and non-diversifiable risk
The Capital Asset Pricing Model argues
that investors should only be compensated
for non-diversifiable risk. Other financial
models allow for multiple sources of nondiversifiable risk, but also insist that
diversifiable risk should not carry any extra
expected return. Still other models do not
accept this contention.
1
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Liquidity crisis - Liquidity crises and asset prices
1
Garleanu and Pedersen (2011) derive a
Margin Capital Asset Pricing Model
(Margin CAPM) that shows how larger
margin requirements are associated with
higher required returns.
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Idiosyncrasy - Idiosyncrasy in economics
For instance, in a complete market in
which the capital asset pricing model
holds, the price of a security is determined
by the amount of systematic risk in its
returns
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Downside risk - Downside risk vs. capital asset pricing model
1
This is in contrast to what the capital
asset pricing model (CAPM) assumes:
that security distributions are
symmetrical, and thus that downside
and upside betas for an asset are the
same
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Beta (finance)
1
Beta is important because it measures the
risk of an investment that cannot be
diversification (finance)|diversified away.
It does not measure the risk of an
investment held on a stand-alone basis,
but the amount of risk the investment
adds to an already-diversified portfolio. In
the capital asset pricing model, beta risk
is the only kind of risk for which investors
should receive an expected return higher
than the risk-free interest rate|risk-free
rate of interest.
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Arbitrage pricing theory - Relationship with the capital asset pricing model (CAPM)
1
The APT along with the capital asset
pricing model (CAPM) is one of two
influential theories on asset pricing
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Arbitrage pricing theory - Relationship with the capital asset pricing model (CAPM)
On the other side, the capital asset
pricing model is considered a demand
side model. Its results, although similar
to those of the APT, arise from a
maximization problem of each
investor's utility function, and from the
resulting market equilibrium (investors
are considered to be the consumers of
the assets).
1
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T-model
Note that all fundamental valuation
methods differ from economic models
such as the capital asset pricing
model and its various descendants;
financial models attempt to forecast
return from a company's expected
future financial performance,
whereas CAPM-type models regard
expected return as the sum of a riskfree rate plus a premium for exposure
1
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Returns-based style analysis - Concept
RBSA uses the Capital asset pricing
model|Capital Asset Pricing Model as
its backbone, of which William Sharpe
was also a primary contributor. In
CAPM, a single index is often used as a
proxy to represent the return of the
market. The first step is to extend this
to allow for multiple market proxy
indices, thus:
1
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Security market line
'Security market line' ('SML') is the
representation of the Capital asset pricing
model. It displays the expected rate of
return of an individual security as a
function of systematic, Systematic
risk|non-diversifiable risk
.[http://www.bettertrades.net/financialterms/security-market-line.asp Security
Market Line]
1
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Alpha (investment) - Definition
1
The 'alpha coefficient' (\alpha_i) is a
parameter in the Capital Asset Pricing
Model (CAPM). It is the root of a
function|intercept of the security
characteristic line (SCL), that is, the
coefficient of the constant in a market
model regression.
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Systematic risk - Systematic risk in finance
An important concept for evaluating an
asset's exposure to systematic risk is Beta
(finance)|Beta. Since Beta indicates the
degree to which an asset's expected
return is correlated with broader market
outcomes, it is simply an indicator of an
asset's vulnerability to systematic risk.
Hence, the capital asset pricing
model|capital asset pricing model (CAPM)
directly ties an asset's equilibrium price to
its exposure to systematic risk.
1
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Certificate in Quantitative Finance - Risk and Return topics
1
* Capital Asset Pricing Model: Singleindex model, beta, diversification,
optimal portfolios, the multi-index
model.
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Capital asset - The most specific common definitions in use are as follows
1
With the further assumption that people
agree on the probability distribution of
future cash flows, it is possible to have
an objective Capital asset pricing
model
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Treynor ratio - Limitations
An alternative method of ranking
portfolio management is Jensen's
alpha, which quantifies the added
return as the excess return above the
security market line in the capital
asset pricing model. As these two
methods both determine rankings
based on systematic risk alone, they
will rank portfolios identically.
1
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Jensen's alpha
1
The security could be any asset, such
as stocks, bonds, or derivatives. The
theoretical return is predicted by a
market model, most commonly the
capital asset pricing model (CAPM).
The market model uses statistical
methods to predict the appropriate riskadjusted return of an asset. The CAPM
for instance uses Beta coefficient|beta
as a multiplier.
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Risk parity - Reception
Risk parity advocates assert that the
unlevered risk parity portfolio, is quite
close to the Capital asset pricing
model#The efficient frontier|tangency
portfolio, as close as can be measured
given uncertainties and noise in the data
1
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Passive management - Rationale
1
# The capital asset pricing model (CAPM)
and related portfolio separation theorems,
which imply that, in equilibrium, all
investors will hold a mixture of the market
portfolio and a riskless asset. That is,
under suitable conditions, a fund indexed
to the market is the only fund investors
need.
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Kenneth French
1
They wrote a series of papers, that cast
doubt on the validity of the Capital asset
pricing model|Capital Asset Pricing Model
(CAPM), which posits that a stock's Beta
(finance)|beta alone should explain its
average return
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Financial correlation
1
Financial correlations play a key role in
modern finance. Under the capital asset
pricing model, CAPM (a model
recognised by a Nobel prize), an
increase in diversification increases the
return/risk ratio. Diversification is
synonymous with inverse correlation:
the lower the correlation between the
constituent holdings, (preferably
negative), the lower the risk of holding
the combined portfolio. Measures of risk
include value at risk VAR, expected
shortfall ES, and enterprise risk
management ERM.
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Roll's critique
1
'Roll's critique' is a famous analysis
of the validity of empirical tests of the
capital asset pricing model (CAPM)
by Richard Roll. It concerns methods
to formally test the statement of the
CAPM, the equation
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Risk-free interest rate - Application
The risk-free interest rate is highly
significant in the context of the general
application of modern portfolio theory
which is based on the capital asset pricing
model
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Consumption-based capital asset pricing model
1
The 'consumption-based capital asset
pricing model' (CCAPM) is used in
finance and economics as an
expansion of the capital asset pricing
model (CAPM). The CCAPM factors in
consumption as a means of
understanding and calculating an
expected return on investment.
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John Lintner
'John Virgil Lintner, Jr.' (February 9,
1916 - June 8, 1983) was a professor at
the Harvard Business School in the
1960s and one of the co-creators
(1965a,b) of the Capital Asset Pricing
Model.
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John Lintner - Bibliography
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* Some new perspectives on tests of
CAPM and other capital asset pricing
models and issues of market efficiency,
John Lintner, 1981, Harvard Institute of
Economic Research discussion paper
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Fama–French three-factor model
1
The traditional asset pricing model,
known formally as the capital asset
pricing model (CAPM) uses only one
variable to describe the returns of a
Portfolio (finance)|portfolio or stock
with the returns of the market as a
whole
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Annual effective discount rate - Business calculations
A common way of estimating
shareholders' discount rates uses
share price data is known as the capital
asset pricing model
1
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Jack L. Treynor - Career
1
Treynor resolved to try to understand the
relation between risk and the discount
rate, and this was the impetus for his most
famous idea in the rough, the Capital
Asset Pricing Model
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Jack L. Treynor - Career
1
This is the kernel of Capital asset
pricing model|CAPM
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Jack L. Treynor - Career
1
In 2007, the International Association
of Financial Engineers (IAFE) named
Treynor as the 2007 IAFE/SunGard
Financial Engineer of the Year (FEOY),
recognizing him for his preeminent
contributions to financial theory and
practice, particularly the essence of
the capital asset pricing model.
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Investment theory
1
'Investment theory' encompasses the body
of knowledge used to support the decisionmaking process of choosing investments for
various purposes. It includes portfolio theory,
the capital asset pricing model, arbitrage
pricing theory, efficient-market hypothesis,
and rational pricing. It is near synonymous
with asset pricing theory, one major focus of
financial economics; see
Financial_economics#Uncertainty|Financial
economics #Uncertainty.
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Harry Markowitz - Research
1
These concepts of efficiency were essential to the
development of the capital asset pricing model.
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Jan Mossin
One of the papers in his doctoral
dissertation was a very important
contribution (1966) to the Capital asset
pricing model|Capital Asset Pricing
Model (CAPM)
1
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Fischer Black - Economic career
On the basis of the capital asset
pricing model, Black concluded that
discretionary monetary policy could
not do the good that Keynesians
wanted it to do. But he also concluded
that it could not do the harm
monetarists feared it would do. Black
said in a letter to Friedman, in
January 1972:
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Fundamentally based indexes - Empirical evidence
1
If the assumptions of the Capital asset
pricing model|Capital Asset Pricing
Model (CAPM) do not hold then there
could be three states of the world in
line with the so-called joint hypothesis
problem explained by Campbell
(1997):Campbell, J.Y., A.W. Lo, and C.
MacKinlay, The Econometrics of
Financial Markets, Princeton
University Press, Princeton, NJ, 1997):
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Risk premium - Finance
1
See Capital asset
pricing model.
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Hamada's equation
In corporate finance, 'Hamada’s
equation', named after Robert
Hamada (professor)|Robert Hamada,
is used to separate the financial risk of
a leverage (finance)|levered firm
from its business risk. The equation
combines the Modigliani-Miller
theorem with the capital asset pricing
model. It is used to help determine the
levered 'Beta
coefficient#Investing|beta' and,
through this, the optimal capital
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Upside risk - Upside Risk vs. Capital Asset Pricing Model
1
Looking at upside risk and downside
risk separately provides much more
useful information to investors than
does only looking at the single Capital
Asset Pricing Model (CAPM) beta
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Upside risk - Examples
Stock A’s Capital asset pricing
model|CAPM beta (finance)|beta will be
larger than that of stock B, and thus stock
A might be viewed by some investors as
being more risky
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Behavioral portfolio theory
1
It does not follow the same principles as
the Capital Asset Pricing Model, Modern
Portfolio Theory and the Arbitrage Pricing
Theory
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Market portfolio
1
The concept of a market portfolio plays an
important role in many financial theories
and models, including the capital asset
pricing model where it is the only fund in
which investors need to invest, to be
supplemented only by a risk-free asset,
depending upon each investor's attitude
towards risk.
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William Forsyth Sharpe
1
Sharpe was one of the originators of
the capital asset pricing model,
created the Sharpe ratio for riskadjusted investment performance
analysis, contributed to the
development of the Binomial options
model|binomial method for the
valuation of option (finance)|options,
the gradient method for asset
allocation optimization, and returnsbased style analysis for evaluating the
style and performance of investment
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William Forsyth Sharpe - Background
1
He started research on generalizing the
results in his dissertation to an equilibrium
theory of asset pricing, work that yielded
the Capital asset pricing model
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Tepper School of Business - Alexander Henderson Award
1
Among the deceased award winners
are John Muth, known as the father of
the rational expectations revolution;
Albert Ando, among the very pioneers
of Intertemporal
consumption|overlappinggenerations models; and Jan Mossin
who derived the Capital Asset Pricing
Model.
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Intertemporal CAPM
1
The 'Intertemporal Capital Asset Pricing
Model', or 'ICAPM', was an alternative
to the Capital Asset Pricing
Model|CAPM provided by Robert C.
Merton|Robert Merton. It is a linear
factor model with wealth and state
variable that forecast changes in the
distribution of future Return
(finance)|returns or income.
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Intertemporal CAPM - Continuous time version
1
Robert Merton|MertonRobert Merton, An
Intertemporal Capital Asset Pricing Model ,
Econometrica, 1973, p. 867-887 considers
a continuous time market in equilibrium.
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Kurtosis risk
1
He felt that the extensive reliance on the
normal distribution for much of the body of
modern finance and investment theory is a
serious flaw of any related models
including the Black–Scholes option model
developed by Myron Scholes and Fischer
Black, and the capital asset pricing model
developed by William Forsyth
Sharpe|William Sharpe
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Judy Lewent - Early life
Lewent received her high school
diploma at Hunter College High
School, her Bachelor of Science|B.S.
in Economics from Goucher College,
and her Master's degree|S.M. in 1972
from the MIT Sloan School of
Management with thesis titled The
French Open-end Investment
Companies (1964 to 1971): an
Application of the Capital Asset
1
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