What is the capital asset pricing model

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Reference no: EM133216457

Assignment:

A. Write out the equation for the capital Market line(CML) and draw it on the graph. Now add set of indifference curves and illustrate how an investor's optimal portfolio is some combination of the risky portfolio and the risk free asset. What is the composition of the risky portfolio?

B. What is the capital asset pricing model (CAPM)? What are the assumptions that underlie the model? What is the security Market line?

C. What is a characteristic line? How is this line used to estimate a stock's beta coefficient? Write out and explain the formula that relates total risk,market risk, and diversifiable risk.

D. What are two potential tests that can be conducted to verify the CAPM? What are the results of such tests? What is Roll's critique of CAPM tests?

E. Briefly explain the difference between the CAPM and the Arbitrage Pricing Theory (APT).

Reference no: EM133216457

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