Download CHAPTER 19

Chapter 19
EXTENSIONS OF CAPITAL ASSET
PRICING THEORY
• What is the zero-beta portfolio
model?
• What are some results of empirical
tests of the capital asset pricing
model?
• What is Roll’s critique of the capital
asset pricing model?
• What is the arbitrage pricing theory?
Contemporary Investments: Chapter 19
Modifications of the CAPM
• Zero-Beta Portfolio.
• Zero-Beta Portfolio Model.
Contemporary Investments: Chapter 19
Figure 19.1 – Zero-Beta Portfolio Model
Contemporary Investments: Chapter 19
Figure 19.2 – Risk/Return Relationship for
Zero-Beta Portfolio Model
Contemporary Investments: Chapter 19
Empirical tests and critique
of the CAPM
• Empirical tests
– Joint hypothesis testing
– Procedure of empirical tests
– Empirical results
Contemporary Investments: Chapter 19
Empirical tests and critique
of the CAPM-Cont.
• Critique of the CAPM
– Limits on tests
– Linear risk/return relationship
– Market portfolio composition
– Range of SMLs
– Market efficiency effects
– Conflicts between proxies
Contemporary Investments: Chapter 19
Figure 19.3 – Empirical Findings for the CAPM
Contemporary Investments: Chapter 19
Figure 19.4 – Empirical Findings for the
CAPM: Apr 1957-Dec 1965
Contemporary Investments: Chapter 19
Figure 19.5 – Different Well-Diversified
Portfolios and Their Corresponding SMLs
Contemporary Investments: Chapter 19
Arbitrage Pricing Theory
• Concept of Arbitrage
• Single-Factor APT
– Single-factor APT for a well-diversified
portfolio
– Example of Exhibit 19.6
• Development of the single-factor APT
Contemporary Investments: Chapter 19
Arbitrage Pricing Theory –
Cont.
• Differences between the single-factor APT
and the CAPM
• APT with multiple factors
– Two-factor APT
– N-factor APT
• Final synopsis of APT
• Implications for Investors
Contemporary Investments: Chapter 19
Figure 19.6 – Arbitraging Portfolio K
Using Portfolio CD
Contemporary Investments: Chapter 19