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This statement is a mathematical fact, requiring no model assumptions. Given a proxy for the market portfolio, testing the CAPM equation is equivalent to testing mean-variance efficiency of the portfolio. The CAPM is tautological if the market is assumed to be mean-variance efficient. [2] 2.
An estimation of the CAPM and the security market line (purple) for the Dow Jones Industrial Average over 3 years for monthly data.. In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio.
The theory of efficient markets has been practically applied in the field of Securities Class Action Litigation. Efficient market theory, in conjunction with "fraud-on-the-market theory", has been used in Securities Class Action Litigation to both justify and as mechanism for the calculation of damages. [71] In the Supreme Court Case ...
The Capital Market Line says that the return from a portfolio is the risk-free rate plus risk premium. Risk premium is the product of the market price of risk and the quantity of risk, and the risk is the standard deviation of the portfolio. The CML equation is : R P = I RF + (R M – I RF)σ P /σ M. where, R P = expected return of portfolio
The normality assumption of the Black–Scholes model does not capture extreme movements such as stock market crashes. The assumptions of the Black–Scholes model are not all empirically valid. The model is widely employed as a useful approximation to reality, but proper application requires understanding its limitations – blindly following ...
The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on capital structure. [1] The basic theorem states that in the absence of taxes , bankruptcy costs, agency costs , and asymmetric information , and in an efficient market , the enterprise ...
International arbitrage pricing theory (IAPT) is an important extension of the base idea of arbitrage pricing theory which further considers factors such as exchange rate risk. In 1983 Bruno Solnik created an extension of the original arbitrage pricing theory to include risk related to international exchange rates hence making the model ...
The consumption-based capital asset pricing model (CCAPM) is a model of the determination of expected (i.e. required) return on an investment. [1] The foundations of this concept were laid by the research of Robert Lucas (1978) and Douglas Breeden (1979). [2] The model is a generalization of the capital asset pricing model (CAPM). While the ...