Chapter 11 – Master It! The CAPM Is One Of The Most Tested Models In Finance. When Beta Is Estimated

Chapter 11 – Master It! The CAPM Is One Of The Most Tested Models In Finance. When Beta Is Estimated
Chapter 11 – Master It! The CAPM Is One Of The Most Tested Models In Finance. When Beta Is Estimated In Practice, A Variation Of CAPM Is Often Used. This Variation Is Called The Market Model. To Derive The Market Model, We Start With The CAPM: E(R;) = R+ B[E(RM) – Rf] Since CAPM Is An Equation, We Can Subtract The Risk-Free Rate From Both Sides, Which Gives Month/Year S&P 500 Stock price Mutual fund price Risk-free rate S&P 500 return Stock return Mutual fund return IBM FMAGX Market risk premium Stock risk premium Mutual fund risk premium 3) Since the mutual fund is a diversified portfolio, we would expect a higher R squared value. The diversification of the portfolio has eliminated much of the systematic risk, therefore more of the return should be explained by the movement of the market. 1) Since the residuals are the part of each return that is not explained by the regression line, the residuals are the systematic risk. As such, the appraisal ratio is a measure of the excess return per unit of systematic risk. A higher appraisal ratio is better since it is greater excess return per unit of risk. 2) The appraisal ratio for each regression estimate is: IBM: #REF! FMAGX: #REF!   Mar 29 2022 03:11 PM

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