Section outline

  • Lecture Contents:

    Capital Market Theory, Return-risk tradeoff, The security market line, Estimating the SML, Tests of the CAPM, APT ETC.  

    Lecture Outcome:

    1. Understand capital market theory as an extension of portfolio theory. 
    2. Recognize the capital market line, which applies to efficient portfolios, and the security market line, which applies to all portfolios as well as individual securities.
    3. Understand and use the capital asset pricing model (CAPM) equation to calculate the required rate of return for a security. 
    4. Recognize an alternative theory of how assets are priced, arbitrage pricing theory.