The Capital Asset Pricing__ Model

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1、TheCapitalAssetPricingModel:TheoryandEvidenceEugeneF.Fama&KennethR.Frenchcontent?TheLogicofCAPM?CAPMFailsinEmpiricalTests?ICAPM?Three-FactorModel?Intheory:CAPMofferspowerfulandintuitivelypleasingpredictionsabouthowtomeasureriskandtherelationbetweenexpectedre

2、turnandrisk.?Inempirical:CAPMispoor—poorenoughtoinvalidatethewayitisusedinapplications.?WHY?simplifyingassumptions?difficultiesinimplementingvalidtestsofthemodel?orsomeotherreasons.ThelogicoftheCAPM?InMarkowitz’smodel(1959):Investorschoose“mean-variance-effi

3、cient”portfolios,whichcanbegetintwoways:1)minimizethevarianceofportfolioreturn,givenexpectedreturn.2)maximizeexpectedreturn,givenvariance.?Sharpe(1964)andLintner(1965)addtwokeyassumptions:?completeagreement?borrowingandlendingatarisk-freerate.ThelogicoftheCA

4、PM?Wecangetasequencesof{x}—theweightofsecurityiinieportfolioe—minimizingtheportfolio'svarianceunderagivenexpectreturn.?Thenwecandrawacurvetoexpresstheresult.ThelogicoftheCAPMThelogicoftheCAPM?Thecurveabc,whichiscalledtheminimumvariancefrontier,tracescombinat

5、ionsofexpectedreturnandriskforportfoliosofriskyassetsthatminimizereturnvarianceatdifferentlevelsofexpectedreturn.?Thetradeoffbetweenriskandexpectedreturnforminimumvarianceportfoliosisapparent.ThelogicoftheCAPM?Addingrisk-freeborrowingandlendingturnstheeffici

6、entsetintoastraightline.Rpf=+?xR(1xR)TER(pf)=xER()+?(1xER)(T)σσ(RpT)=(1?xR)()?When0

7、ar.?ifthereareNriskyassetsThelogicoftheCAPM?Sharpe-Lintner’sversion:Allowunrestrictedrisk-freeborrowingandlending.ThelogicoftheCAPM?FischerBlack’sversion:Unrestrictedrisk-freeborrowingandlendingisanunrealisticassumption.Heprovedthatunderunrestrictedshortsell

8、ingofriskyassets,portfoliosmadeupofefficientportfoliosarethemselvesefficient.Thus,themarketportfolioisefficient.EarlyEmpiricalTests?CAPMTest:?Testwhethertheinterceptequalstozero,thatiswhetherthe