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9-2
Assumptions
Individual investors are price takers
Single-period investment horizon
Investments are limited to traded financial
assets
No taxes and transaction costs
9-3
Assumptions Continued
Information is costless and available to all
investors
Investors are rational mean-variance
optimizers
There are homogeneous expectations
9-4
9-5
9-6
9-7
9-8
9-9
9-10
Market variance
M2
M2
P wk k
k
E (rM ) rf M E (rM ) rf
9-12
9-13
9-14
Ri i i RM ei
The index model beta coefficient turns out to
be the same beta as that of the CAPM
expected return-beta relationship
9-15
9-16
9-18
9-19
9-20
9-21
9-22
Var ( RM CM )
Cov(Ci , RM )
Var ( RM CM )
9-23