Lecture 2 - Asset Pricing Models

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1、1AssetPricingModels2LearningobjectivesAftercompletionofthischapteryoushouldbeableto:intuitivelyunderstandthe:PortfoliotheoryRelationshipbetweenriskandreturnSystematicandunsystematic(unique)riskcapitalmarketline(CML)capitalassetpricingmodel(CAPM)andthesecuritymarketline(SML)linkbetwee

2、ntheCMLandSMLapplytheCAPMinpricingriskyassetsincludingshare3LearningobjectivesAftercompletionofthischapteryoushouldbeableto:understandtheimportanceofportfoliodiversificationininvestmentdecisionmakingunderstandthemeanvarianceopportunitysetdescribeportfolioconstructionmethodsusetheCAPM

3、tojustifyvaluesforrelevantinputparametersunderstandtheimportanceofassumptionsunderlyingtheCAPMexplainthedifficultiesassociatedwithtestingtheCAPMdebatewhethertheCAPMisanappropriatemodeltopriceriskyassets.4ChapteroutlineIntroductionPortfolioTheoryTheCAPMUsingtheCAPMTestingtheCAPMExtens

4、ionstotheCAPMSummaryCONTEXTOFDISCUSSIONPOSSIBLEATTITUDETOWARDSRISKOtherassumptionsInvestorisrationalWillrankvariousalternativeinvestmentsInvestorisriskaverseDislikeincreasevarianceininvestmentreturnsOneperiodinvestmenthorizonNofrictionstoinvestingNotransactioncostsNotaxesCanborrowand

5、lendatriskfreerateBehaviourofAustraliaAssetClassesEquityS&P/ASX200AccumulationIndexPropertyS&P/ASXREITsIndexCashCumulativeyieldonthe90daybankacceptedbillFixedInterestUBSCommonwealthBondAccumulationIndexBehaviourofAustraliaAssetClassesEquity$307Property$278FixedInterest$241Cash$212CPI

6、Rosefrom100to$142insameperiodComputationofreturnsrevisitedSupposethesharepriceofABCis$100.Attheendoftheyearthereisanequalchancethatthestockwillbeworth$90,$110or$130.Thereforereturncouldbe-10%,10%or30%Whataboutexpectedreturn?Expectedreturn=1/3(-10+10+30)=+10or10%Theexpectedendofyearpr

7、ice=FV(1+r)=$100(1.1)=$110ThePresentValue,PV=$110/(1.1)=$100TheexpectedreturnisthereforethecorrectrateatwhichtodiscountexpectedcashflowforABC’sstockIftheoddareunchangedandweobservethestockofABCoveralargenumberofyears,returnwillbe-10%athirdoftime,10%afurtherthirdand30%fortherest.Deter

8、miningthedis