CAPM

Question 1

CAPM Assumptions 6

Answer 1

1) Price taking; 2) Complete markets; 3) Risk free; 4) No taxes or transaction costs; 5) mean variance optimizers; 6) Same expectations

Question 2

Capital market line

Answer 2

connects risk free to tangency

Question 3

FOC of CAPM (also what is theta)?

Answer 3

\theta = alpha^-1 \Sigma^-1 (mu-q/q_f)

where q_f is price of risk free and mu is expected payoff
theta is number of shares (not excess returns)

Question 4

Rewrite CAPM allocations as a function of market

Answer 4

Theta = a_bar / a_i * m

Question 5

CAPM regression

Answer 5

E[R_a]-R_f = \beta_am(E[R_m]-R_f)

Question 6

Roll Critique

Answer 6

Can never observe true market