1. Chapter 18 CAPITAL ASSET PRICING THEORY
What is the capital market line (CML)?
How is the Capital Asset Pricing Model (CAPM) developed?
What is the difference between the standard deviation risk and beta risk measures?
How can an investor apply the CAPM to security analysis?
How do you estimate beta?
What are the good news and the bad news about beta?
Contemporary Investments: Chapter 18

2. Assumptions of the Capital Asset Pricing Model
Investors have homogeneous expectations
Frictionless capital markets
Investors are rational and seek to maximize their expected utility functions
Investment is for one-period only
All investors can borrow or lend at the riskfree rate
Contemporary Investments: Chapter 18

3. Efficient frontier and the optimal risky portfolio
Developing the capital market line (CML)
Introducing the riskfree asset.
The capital market line (CML) or the borrowing-lending line.
The Portfolio Separation Theorem
The market portfolio, M
Contemporary Investments: Chapter 18

4. Figure 18.1 – Efficient Frontier
Contemporary Investments: Chapter 18

5. Contemporary Investments: Chapter 18
Figure 18.2 – Efficient Frontier and Utility Curves for Investors A and B
Contemporary Investments: Chapter 18

6. Contemporary Investments: Chapter 18
Figure 18.3 – Combinations of the Risk-Free Asset RF and Risky Portfolios P1 and P2
Contemporary Investments: Chapter 18

7. Contemporary Investments: Chapter 18
Figure 18.4 – Combinations of the Risk-Free Asset RF and the Risky Portfolio M
Contemporary Investments: Chapter 18

8. Figure 18.5 – CML and Individual Utility Curves
Contemporary Investments: Chapter 18

9. Figure 18.6 – CML: The Borrowing-Lending Line
Contemporary Investments: Chapter 18

10. Capital Asset Pricing Model
Developing a relative risk measure
Understanding beta
Systematic risk or market risk
Diversifiable risk or firm-specific risk
Contemporary Investments: Chapter 18

11. Figure 18.7 – CML and Individual Securities
Contemporary Investments: Chapter 18

12. Contemporary Investments: Chapter 18
CAPM derivation
Security risk and return
Reward for investing in a security
Security risk
Security’s reward-to-risk ratio
Risk/return relationship
The security market line (SML)
Differences between the CML and SML
Contemporary Investments: Chapter 18

13. Figure 18.8 – Security Market Line (SML)
Contemporary Investments: Chapter 18

14. CAPM and security analysis
Estimating the required return.
Estimating the predicted return.
Security analysis decision rule.
Comparison with fundamental analysis.
Contemporary Investments: Chapter 18

15. Contemporary Investments: Chapter 18
Estimating Beta
Security characteristic line
Information service beta estimates
Calculating beta: Separating systematic risk from diversifiable risk.
Differences between the SML and the security characteristic line
Contemporary Investments: Chapter 18

16. Good news and bad news about Beta
How reliable are beta estimates?
Does beta really measure risk?
The verdict on beta.
Implications for investors
Contemporary Investments: Chapter 18

17. Figure 18.9 – Security Market Line Analysis
Contemporary Investments: Chapter 18

18. Figure 18.10 – Regression Analysis to Estimate Beta
Contemporary Investments: Chapter 18