Financial Markets – Fall, 2019 – Sept 17, 2019

Main Conclusion of Markowitz Theory Mean Boundary of “feasible” portfolios “Efficient” Portfolios σ σ

Tobin’s Result Mean Use of Leverage E Risk Free Asset Standard Deviation

The Capital Asset Pricing Model Markowitz – mean, variance analysis Tobin – the role of the risk-free rate Sharpe (and others) – beta and the market basket

CAPM – two conclusions M – the “efficient” basket The pricing rule based upon “beta” Bill Sharpe

Capital Market Line M Rf Mean What is M ? Answer: contains all “positively” priced assets, weighted by their “market” values. Rf STDD

i = Rf + i [M – Rf] Security Market Line i M Mean Rf Beta 1

The End