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  • How to calculate Jensen’s alpha in Excel

    How to calculate Jensen’s alpha in Excel

    The purpose of this tutorial is to teach you to calculate Jensen’s alpha in Excel. We’ll estimate the Jensen’s alpha on Amazon (AMZN) shares using the S&P500 as the market benchmark and the 13-week T-bill as the proxy of risk-free asset. Our analysis will be based on five years of monthly data (i.e., 60 observations…

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  • How to calculate portfolio risk and return in Excel

    How to calculate portfolio risk and return in Excel

    In this tutorial, we’ll teach you how to calculate portfolio risk and return in Excel. We’ll focus on an example where we construct a portfolio of the following three stocks: Tesla (TSLA), Amazon (AMZN), and Netflix (NFLX). We offer the tutorial in a video format as well (see the contents box below). If you’re unfamiliar…

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  • Ambiguity aversion

    Ambiguity aversion

    Many of us might have heard about “risk aversion“, which is a general dislike for risk. But, what is “ambiguity aversion”? To address this question, we need to first distinguish between “risky events” and “ambiguous events”. Let’s do that through a practical example. Imagine a simple coin toss game where you win $1 if the…

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  • Psychology of trading

    Psychology of trading

    The psychology of trading encompasses the emotional states and moods that traders go through during their trading activities. Emotional trading can have an adverse impact on a trader’s performance, leading to mental issues as well as financial loss. Therefore, all traders should have at least a basic understanding of how emotions influence trading activity. We’ve…

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  • Limit order book

    Limit order book

    In a market setting, a limit order book for a particular security (e.g., a stock) is the collection of limit orders (both buy and sell) submitted by traders who are interested in trading that security. What does a limit order book look like? Figure 1 illustrates what a typical limit order book looks like. We…

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  • Capital allocation line

    Capital allocation line

    When a risk-free asset exists in an economy, investors can add that asset to their portfolios if they wish so. In the risk-return space, the combination of the risk-free asset and any risky asset is a straight line. This line is called the capital allocation line as it shows how an investor’s capital is allocated…

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  • How to calculate beta in Excel

    How to calculate beta in Excel

    In this tutorial, we’ll show you how to calculate beta in Excel. First, we explain the data you need before getting started. Then, we offer four different ways of computing betas in Excel (the first one is the fastest if you’re in a rush!). If you prefer a video tutorial, that is provided at the…

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  • Security market line

    Security market line

    The security market line depicts the linear relationship between expected return and systematic risk, which is measured by beta, according to the capital asset pricing model (CAPM). Specifically, the equation of the security market line is nothing but the CAPM formula: where E[Ri] is the expected return on asset i, E[Rm] is the expected return…

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  • Market portfolio

    Market portfolio

    We have so far learned how to calculate the risk and return of portfolios and how to trace an efficient frontier through mean-variance optimization. It is now time to introduce a special portfolio that will play a significant role when we discuss the CAPM: The market portfolio. What is the market portfolio? The market portfolio is the…

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  • CAPM calculator, equation, assumptions

    CAPM calculator, equation, assumptions

    The capital asset pricing model (or CAPM) is among the most widely-used asset pricing models by stock analysts and portfolio managers. Its popularity arises from its simplicity and elegance. Analysts can use it to forecast returns or to estimate the cost of equity. In this post, we offer a CAPM calculator and discuss the model…

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