1. Diagrams of CAPM Chapter 10 figures

2. Correlation coefficient

3. Portfolio variance In terms of the correlation coefficient

4. Diversification, minimum variance  E(R)  A B MV

5. The case of r = 1

6. Portfolio expected return

7. Still  = 1

8. Expected return

9. Substitute out X B

10. Diversification, minimum variance  E(R)  A B MV

12. Diversification with a risk-free asset  E(R) A= risk-free asset B MV

13. Capital Market Line Expected return of portfolio Standard deviation of portfolio’s return. Risk-free rate (R f ) M... Capital market line. X Y.. Indifference curve preferred

14. Argument for the security market line  Only beta matters  A mix of T-Bills and the market can produce any beta.  An asset with that beta is no better or worse than the two-fund counterpart  Hence it has the same return.

15. Security Market Line Expected return on security (%) Beta of security RmRm RfRf 1 M. 0.8 S. T. Security market line (SML) S is overvalued. Its price falls T is undervalued. Its price rises...

16. Exam item  What is the interest rate?

17. Don’t write  The interest rate is the time value of money.

18. Do write:  The interest rate is the premium for current delivery of money.  P 0 is the price of current money in current money, namely 1.  P 1 is the price of time-one money in terms of current money, something <1.  P