Exam 9 > BKM 9: CAPM > Flashcards

BKM 9: CAPM Flashcards

(18 cards)

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1
Q

Mutual fund theorem

A

Passive strategy of investing in a market-index portfolio is efficient

Attempts to beat it incur costs with no offsetting benefit

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2
Q

Risk premium on market portfolio

A

Aσ2M

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3
Q

Market price of risk

A
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4
Q

CAPM Equation

A
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5
Q

CAPM predicts __________________

A

returns on investments in the securities of the firm

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6
Q

Security Market Line (SML)

A

Relationship between beta and expected return; all securities must lie on SML in market equilibrium

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7
Q

Key implications of CAPM

A
  1. Market portfolio is efficient
  2. Risk premium is proportional to beta
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8
Q

Individual behavior assumptions of CAPM

A

Investors are rational, mean-variance optimizers

Planning horizon is a single period

Identical input lists

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9
Q

Market structure assumtions of CAPM

A

All assets are publicly held or traded, short positions allowed, and common risk free rate

All information is publicly available

No taxes

No transaction costs

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10
Q

Challenges of CAPM

A

Liability of short position unlimited

Limited supply of shares of stock

Prohibition of short sales

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11
Q

Efficient frontier portfolio characteristics

A
  1. Any portfolio that is a combination of frontier portfolios is also on the frontier
  2. Every portfolio on efficient frontier has a companion portfolio with which is is uncorrelated (called zero-beta)
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12
Q

Zero-beta portfolio

A

Results when investors face restrictions on borrowing

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13
Q

Two assets that are not traded

A

Human capital

Privately held businesses

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14
Q

SML equation for human capital

A
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15
Q

ICAPM

A
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17
Q

Issues with CCAPM

Study These Flashcards
A
  1. Consumption growth figures published infrequently
  2. Measured with significant error
18
Q

Two adjustments to CAPM for liquidity

Study These Flashcards
A
  1. Returns need to be increased if stocks are illiquid
  2. Returns need to be increased if subject to liquidity premium
Exam 9
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