Questions tagged [capm]
The capital asset pricing model is a model that allows to determine the theoretical rate of asset returns required by an investor, given the asset systematic risk or market risk.
307 questions
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Why is the use of CAPM justified for estimating the cost of equity?
For an investor in a stock, stock returns are how they are paid for providing their capital. Why is the measure of performance for how capital is utilized by a company tied to the return they generate ...
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Relationship between stock returns and interest rates from CAPM model
I am trying to derive the relationship between market prices of various assets and changes in risk-free interest rates for a study project. For bonds this is straightforward, you can just start from ...
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Why is the tangency portfolio the market portfolio in a world where not everyone holds the same portfolio?
I understand how the efficient frontier is formed, and that the point of tangency with the CAL is the portfolio that offers the greatest excess returns over the risk-free rate per unit volatility (i.e ...
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Expected return of the underlying not an explicit input in the binomial options pricing formula, but volatility is?
I'm new to options (finance in general) and am trying to learn the theory. I have read that the argument for why the underlying expected growth doesn't matter is that we're pricing the options ...
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How to Handle Zero Stock Returns When Calculating Excess Return in CAPM Analysis?
everyone. I am new to this beautiful quantitative field, and I have a question regarding CAPM. I'm using daily frequency data of S&P500 from Jan 1990 to September 2024. When analysing my dataset, ...
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Help understand how to perform Fama-Macbeth cross-sectional regression
I am reading Asset Pricing by Cochrane. I am struggling to do the Fama-Macbeth cross-sectional regression and I am questioning my understanding of how to do this. I have no problems understanding how ...
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Finding an annual beta from daily data
In computing a CAPM analysis I have daily data for the market and security, but I have yearly per annum figures for the risk free rate. As such I am trying to annualise my market returns and my beta ...
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How did the author work this out for CAPM and Utility?
Edit:The book is "Foreign Exchange: Practical Asset Pricing and Macroeconomic Theory" by Adam S Iqbal. I asked a question relating to these equations a month ago at CAPM and Marginal Utility:...
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CAPM and Marginal Utility: How does this derivation work?
I came across this obstacle in the book Foreign Exchange: Practical Asset Pricing and Macroeconomic Theory by Adam.S.Iqbal(I have attached screenshots below) For 1.40 the author claims that we must ...
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Under what circumstances is hedging a portfolio by shorting index futures profitable? (John C. Hull 11e Practice Questions 3.25)
This question is based on a claim made in both practice question 3.25 and section 3.5 of Options, Futures and Derivatives by John C. Hull, 11th edition. The question On July 1, an investor holds 50,...
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Fama&French models for asset returns applied to European Market
I am trying to use the F&F 3-factor and 5-factor models for the European Market (monthly data frequency). I downloaded the dataset provided by Fama&French and tried to apply the regressions ...
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Issues with a time-dependent market price of risk
I have a time-dependent market price of risk of an asset as: $$ \lambda(t) = \frac{\mu(t)-r(t)}{(T-t)\sigma} $$ where $t$ is the current time and $T$ is a constant maturity time of an asset. Here, $\...
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Question about pricing kernel definition in "Quality minus junk" paper
I'm reading the paper "Quality minus junk" by Asness et al. published in Review of Accounting Studies (2019). The authors present the following definition of the pricing kernel on page 2: $$ ...
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Question about marginal risk contribution / portfolio volatility decomposition
I am trying to understand the rule where you add a new asset to a portfolio if its Sharpe ratio is greater than the product of the portfolio sharpe ratio and the correlation between the portfolio and ...
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Should I convert monthly data into yearly for CAPM?
I am trying to use the CAPM. I gathered monthly data on German government bonds and DAX40 (it's an index that contains top 40 German firm). Then based on only one company like Volkswagen monthly stock ...
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