Category: asset pricing
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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
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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Risk aversion coefficient – meaning and formula
When we discussed investors’ risk preferences, we distinguished between risk-averse, risk-neutral, and risk-seeking behavior. We also explained that risk-averse investors expect compensation for bearing risk, which is called a risk premium. But, how do measure risk aversion? The answer is the risk aversion coefficient. It quantifies the degree to which an individual dislikes risk. In […]
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Arbitrage pricing theory (APT)
Arbitrage pricing theory (APT) is an asset pricing model developed by the American economist Stephen Ross in the mid-1970s. While the capital asset pricing model (CAPM) posits a single systematic risk factor, which is the market risk, arbitrage pricing theory accommodates multiple risk factors. As such, APT has been the driving force behind the growth of multi-factor […]
