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Capital Market Efficiency, Portfolio Theory and the Capital Asset Pricing Model

Capital Market Efficiency, Portfolio Theory and the Capital Asset Pricing Model. International Financial Markets Yasmin Shoaib. Yasmin Shoaib. Capital Market Efficiency, Portfolio Theory and the Capital Asset Pricing Model.

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Capital Market Efficiency, Portfolio Theory and the Capital Asset Pricing Model

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  1. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model International Financial Markets Yasmin Shoaib

  2. Yasmin Shoaib Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model Agenda1. Introduction2. Capital Market Efficiency3. Portfolio Theory4. Capital Asset Pricing Model 4.1 Capital Market Theory 4.2 The Capital Market Line 4.3 The Security Market Line 4.4 Critics on the CAPM5. Conclusion

  3. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model • Basic concept for understanding of models • How should an optimal portfolio be combined? • Which return can be expected of a portfolio, if there is a risk-free asset? • Which risk is relevant for a single asset in a portfolio? Yasmin Shoaib 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 1.Introduction 5.Conclusion

  4. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model • basic concept for Portfolio Theory and CAPM • refers to information processing • all agents have rational expectations Yasmin Shoaib 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 1.Introduction 5.Conclusion

  5. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model Efficient Markets Hypothesis (Eugene Fama) strong Yasmin Shoaib Critics: Behavioural Finance semi-strong weak 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 1.Introduction 5.Conclusion

  6. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model Dr. Harry Markowitz Yasmin Shoaib new model for portfolio selection: high rate of return low risk 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 1.Introduction 5.Conclusion

  7. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model Yasmin Shoaib deviations of single assets correlation 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 1.Introduction 5.Conclusion

  8. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model • efficient combination: • same return + less risk • higher return + same risk • higher return + less risk Yasmin Shoaib 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 1.Introduction 5.Conclusion

  9. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model Which return, if risk-free asset exists? Which price/risk for single security? Capital Market Line Security Market Line • Capital Market Theory • homogenous expectations • information efficiency • existence of risk-free asset Yasmin Shoaib 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 1.Introduction 5.Conclusion

  10. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model Which return, if risk-free asset exists? Capital Market Line Yasmin Shoaib 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 1.Introduction 5.Conclusion

  11. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model Which return, if risk-free asset exists? Capital Market Line Tobin Separation (James Tobin) separation between finance and investment decision Yasmin Shoaib 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 1.Introduction 5.Conclusion

  12. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model Which price/risk for single security? Security Market Line Yasmin Shoaib Which effect on return and risk of fruitbasket-portfolio, if amount of apple-asset is increased? 27 (9/10) + 3 (1/10) 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 1.Introduction 5.Conclusion

  13. Beta=1 Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model Which price/risk for single security? Security Market Line Yasmin Shoaib Beta = risk of a single asset 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 1.Introduction 5.Conclusion

  14. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model Which price/risk for single security? Basic Statement of CAPM: expected rate of return of risky asset determined by risk-free rate of return + risk premium Security Market Line Yasmin Shoaib 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 1.Introduction 5.Conclusion

  15. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model Example: risk-free rate of return: 5% return on market portfolio: 9% individual risks: apple: 0.7 (beta) banana: 1 grape: 1,4 Which price/risk for single security? Security Market Line apple: 0.05 + (0.7 x 0.04) = 0.078 banana: 0.05 + (1 x 0.04) = 0.09 grape: 0.05 + (1.4 x 0.04) = 0.106 Yasmin Shoaib expected rate on return: risk-free rate of return + (beta x market risk premium) 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 1.Introduction 5.Conclusion

  16. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model • Critics on the CAPM • assumptions not realistic • model not yet verified nor falsified in analyses • some effects not explainable by CAPM Yasmin Shoaib 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 1.Introduction 5.Conclusion

  17. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model • Capital asset pricing model builds on Markowitz portfolio theory and portfolio theory builds on efficient market hypothesis. • Capital market efficiency refers to information processing. • Markowitz portfolio theory: optimal portfolio combines assets with disireable individual risk-return relation and negative correlations. • Capital asset pricing model: expected rate of return determined by risk-free rate of return plus risk premium. Yasmin Shoaib 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 1.Introduction 5.Conclusion

  18. Capital Market Efficiency,Portfolio Theory andthe Capital Asset Pricing Model End Yasmin Shoaib

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