CAPM Testing & Implementing Porftolio Theory

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Presentation transcript:

CAPM Testing & Implementing Porftolio Theory Professor Thomas Chemmanur 1

TESTING THE CAPM RUN A CROSS-SECTIONAL REGRESSION: ACROSS STOCKS, IN A GIVEN PERIOD. IF THE CAPM HOLDS, WE SHOULD GET: THEORETICAL (CAPM) LINE ACTUAL (EMPIRICAL) LINE i 2 2

IMPLEMENTING PORTFOLIO THEORY IN PRACTICE ASSUMING THAT ASSET RETURNS ARE “STATIONARY”, WE CAN USE HISTORICAL DATA; TYPICALLY, USE MONTHLY DATA. N = NUMBER OF ASSETS n = NUMBER OF PERIODS OF DATA AVAILABLE SIMILARLY, WE CAN ESTIMATE THE VARIANCE, 3 3

IMPLEMENTING PORTFOLIO THEORY IN PRACTICE COVARIANCE, CORRELATION, 4 4