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

Capital Market Efficiency, Portfolio Theory and the Capital Asset Pricing Model Agenda 1.Introduction 2.Capital Market Efficiency 3.Portfolio Theory 4.Capital Asset Pricing Model 4.1Capital Market Theory 4.2The Capital Market Line 4.3The Security Market Line 4.4Critics on the CAPM 5.Conclusion Yasmin Shoaib

Capital Market Efficiency, Portfolio Theory and the Capital Asset Pricing Model Yasmin Shoaib 1.Introduction 4.Capital Asset Pricing Model 2.Capital Market Efficiency 5.Conclusion 3.Portfolio Theory 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?

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

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

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

Capital Market Efficiency, Portfolio Theory and the Capital Asset Pricing Model Yasmin Shoaib 1.Introduction 4.Capital Asset Pricing Model 2.Capital Market Efficiency 5.Conclusion 3.Portfolio Theory correlationdeviations of single assets

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

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

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

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

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

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

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

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

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

Capital Market Efficiency, Portfolio Theory and the Capital Asset Pricing Model Yasmin Shoaib 1.Introduction 4.Capital Asset Pricing Model 2.Capital Market Efficiency 5.Conclusion 3.Portfolio Theory 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.

Capital Market Efficiency, Portfolio Theory and the Capital Asset Pricing Model Yasmin Shoaib End