Example of equilibrium model as Capital Asset Pricing Model
Explain the example of equilibrium model as Capital Asset Pricing Model.
Expert
Capital Asset Pricing Model is an illustration of an equilibrium model, as opposed to a no-arbitrage model like Black-Scholes. The mathematics of Capital Asset Pricing Model is very easy. We relate the random return upon the ith investment, Ri, to the random return upon the market as an entire (or several representative index), RM by
Ri=αi+βiRM+ ?i
There i is random with zero mean and standard deviation ei, and uncorrelated along with the market return RM and another ?j. There are three parameters related with all assets as: αi, βi and ei. In this representation we can notice that the return upon an asset can be decomposed in three parts: a constant drift; that random part common along with the index; and a random part not correlated with the index, ?i. The random part i is unique to the ith asset. See how all the assets are associated to the index but are otherwise totally uncorrelated.
How do flotation costs affect the cost of raising the capital when a company issues new securities?
Explain different forms of market efficiency.
Illustrates an example of Efficient-market hypothesis?
What is Sub-additivity?
Explain the term implied volatility in Black–Scholes option-pricing equation.
Who were solved out stochastic spot rate models problem?
Normal 0 false false
Explain the Probabilistic modelling approach in Quantitative Finance.
Explain asymptotic analysis in interest rate model.
How does marking to market affect risk management in derivatives trading?
18,76,764
1940837 Asked
3,689
Active Tutors
1458388
Questions Answered
Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!