05 - Capital Asset and Arbitrage Pricing

A model that relates the required rate of return for a security to its risk as measured by beta.

The portfolio for which each security is held in proportion to its market value.

States that all investors desire the same portfolio of risky assets and can be satisfied by a single managed fund.

Implication of the CAPM that security risk premiums (expected excess returns) will be proportional to beta.

Graphical representation of the expected return-beta relationship of the CAPM.

Plot of a security's expected excess return as a function of the excess return on the market.

Models of security returns positing that returns respond to several systematic factors.

A theory of risk-return relationships derived from no-arbitrage considerations in large capital markets.

A portfolio sufficiently diversified that non-systematic risk is negligible.

A well-diversified portfolio constructed to have a beta of 1.0 on one factor and a beta of zero on any other factor.