Summary Investment Management 254 Notes for A1,A2, A3

Chapter 7 - capital asset pricing model
7.1 The CAPM
•
formula used to calculate the expected return of a given
security given
,
its level of systematic risk

Beta
-




sensitivity of a stocks return to the return on the
market portfolio
-




Market risk exposure
market Portfolio
portfolio all assets in the
-
of
economy
a

total Risk


✓
am
1. Non -


systematic risk
-


diverifiable
1 diversity away ,
be investing in more
eider
-




.si?iabl,erik- - -
,
,
securities )

market risk
2. Market Risk -

constant can't , get
away from it
-

.




✓
n
Market ✗ unique risk


Beta (B)
risk
The higher B. thehigher systematic
•




•
measures degree of systematic risk relative
to market portfolio
"" " M security / Market portfolio)



2µg
13=1 →
average
portfolio
B) I → aggressive : security with above average market risk

↳ more volatile compared to market portfolio
risk
Bel → Defensive : a security with below average market
psi
↳ less volatile compared to market portfolio

time



work out Beta ( B )

t.pi.dstokmturna.piM.ca/tp??pm
to
2 way p
market portfolio
p
,
A market stock Varl Rm )