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CFS C5TX: The capital asset pricing model and multi-factor models (the…
CFS C5TX: The capital asset pricing model and multi-factor models
introduction
A short history of shares, bonds and bills
a. returns
key terms: government bonds, gilts, Treasury bills , geometric means, arithmetic means
b. risk
the capital asset pricing model
a. from the Capital Market Line (CML) to the Security Market Line (SML)
b. beta
key terms: unique or unsystematic risks or idiosyncratic or specific risk, diversifiable, systematic or market risk, capital asset pricing model (CAPM), beta
c. the security market line (SML)
key terms: risk-return line
d. estimating some expected returns
e. calculating beta
characteristic line
f. Applications of the CAPM
i investment in the financial markets
portfolio selection
mispriced shares
measuring portfolio performance
Treynor's ratio, Sharpe's ratio
ii. calculating the required rate of return on a firm's investment projects
g. Accepted theory and controversial theory
h. technical problems with the CAPM
i measuring beta
ii. ex ante (before the event) theory with ex post testing
iii. the market portfolio is unobtainable
iv. one-period model
v. unrealistic assumptions
i. does the CAPM work in practice?
Factor models
a. A one-factor model
b. A two-factor model
c Multi-factors models
The arbitrage pricing theory
The three-factor model
An alternative approach to the risk-return relationship
Project appraisal and systematic risk
Sceptics' views- alternative perspectives on risk
a. David Dreman
b. Warren Buffet
c. Benjamin Graham
key points and concepts