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Lecture Presentation Software
to accompany
Investment Analysis and
Portfolio Management
Sixth Edition
by
Frank K. Reilly & Keith C. Brown
Chapter 9
Copyright 2000 by Harcourt, Inc. All rights reserved.
Chapter 9 - An Introduction to
Asset Pricing Models
Questions to be answered:
What are the assumptions of the capital asset
pricing model?
What is a risk-free asset and what are its risk-return
characteristics?
What is the covariance and correlation between the
risk-free asset and a risky asset or portfolio of risky
assets?
What is the expected return when you combine the
risk-free asset and a portfolio of risky assets?
What is the standard deviation when you combine
the risk-free asset and a portfolio of risky assets?
When you combine the risk-free asset and a
portfolio of risky assets on the Markowitz efficient
frontier, what does the set of possible portfolios
look like?
Given the initial set of portfolio possibilities with a
risk-free asset, what happens when you add
financial leverage (that is, borrow)?
What is the market portfolio, what assets are
included in this portfolio, and what are the relative
weights for the alternative assets included?
What is the capital market line (CML)?
What do we mean by complete diversification?
How do we measure diversification for an
individual portfolio?
What are systematic and unsystematic risk?
Given the capital market line (CML), what is the
separation theorem?
Given the CML, what is the relevant risk measure
for an individual risky asset?
What is the security market line (SML) and how
does it differ from the CML?
What is beta and why is it referred to as a
standardized measure of systematic risk?
How can you use the SML to determine the
expected (required) rate of return for a risky asset?
Using the SML, what do we mean by an
undervalued and overvalued security, and how do
we determine whether an asset is undervalued or
overvalued?
What is an assets characteristic line and how do
you compute the characteristic line for an asset?
What is the impact on the characteristic line when
you compute it using different return intervals (e.g.,
weekly versus monthly) and when you employ
different proxies (i.e., benchmarks) for the market
portfolio (e.g., the S&P 500 versus a global stock
index)?
What is the arbitrage pricing theory (APT) and how
does it differ from the CAPM in terms of
assumptions?
How does the APT differ from the CAPM in terms
of risk measure?
Capital Market Theory:
An Overview
Capital market theory extends portfolio
theory and develops a model for pricing all
risky assets
Capital asset pricing model (CAPM) will
allow you to determine the required rate of
return for any risky asset
Assumptions of
Capital Market Theory
1. All investors are Markowitz efficient
investors who want to target points on the
efficient frontier.
The exact location on the efficient frontier and,
therefore, the specific portfolio selected, will
depend on the individual investors risk-return
utility function.
Assumptions of
2. Investors can borrow or lend any amount
of money at the risk-free rate of return
(RFR).
Clearly it is always possible to lend money at
the nominal risk-free rate by buying risk-free
securities such as government T-bils. It is not
always possible to borrow at this risk-free rate,
but we will see that assuming a higher
borrowing rate does not change the general
results.
Assumptions of
3. All investors have homogeneous
expectations; that is, they estimate identical
probability distributions for future rates of
return.
Again, this assumption can be relaxed. As long
as the differences in expectations are not vast,
their effects are minor.
Assumptions of
4. All investors have the same one-period
time horizon such as one-month, six
months, or one year.
The model will be developed for a single
hypothetical period, and its results could be
affected by a different assumption. A
difference in the time horizon would require
investors to derive risk measures and risk-free
assets that are consistent with their time
horizons.
Assumptions of
5. All investments are infinitely divisible,
which means that it is possible to buy or sell
fractional shares of any asset or portfolio.
This assumption allows us to discuss
investment alternatives as continuous curves.
Changing it would have little impact on the
theory.
Assumptions of
6. There are no taxes or transaction costs
involved in buying or selling assets.
This is a reasonable assumption in many
instances. Neither pension funds nor religious
groups have to pay taxes, and the transaction
costs for most financial institutions are less than
1 percent on most financial instruments. Again,
relaxing this assumption modifies the results,
but does not change the basic thrust.
Assumptions of
7. There is no inflation or any change in
interest rates, or inflation is fully
anticipated.
This is a reasonable initial assumption, and it
can be modified.
Assumptions of
8. Capital markets are in equilibrium.
This means that we begin with all investments
properly priced in line with their risk levels.
Assumptions of
Some of these assumptions are unrealistic
Relaxing many of these assumptions would
have only minor influence on the model and
would not change its main implications or
conclusions.
Judge a theory on how well it explains and
helps predict behavior, not on its
assumptions.
Risk-Free Asset
An asset with zero variance
Zero correlation with all other risky assets
Provides the risk-free rate of return (RFR)
Will lie on the vertical axis of a portfolio
graph
Risk-Free Asset
Covariance between two sets of returns is
=
=
n
1 i
j j i i ij
)]/n E(R - )][R E(R - [R Cov
Because the returns for the risk free asset are certain,
0
RF
= o
Thus R
i
= E(R
i
), and Ri - E(Ri) = 0
Consequently, the covariance of the risk-free asset with any
risky asset or portfolio will always equal zero. Similarly the
correlation between any risky asset and the risk-free asset
would be zero.
Combining a Risk-Free Asset
with a Risky Portfolio
Expected return
the weighted average of the two returns
) )E(R W - (1 (RFR) W ) E(R
i RF RF port
+ =
This is a linear relationship
Standard deviation
The expected variance for a two-asset portfolio is
2 1 1,2 2 1
2
2
2
2
2
1
2
1
2
port
r w w 2 w w ) E( o o o o o + + =
Substituting the risk-free asset for Security 1, and the risky
asset for Security 2, this formula would become
i RF i RF
o o o o o
i RF, RF RF
2 2
RF
2 2
RF
2
port
)r w - (1 w 2 ) w 1 ( w ) E( + + =
Since we know that the variance of the risk-free asset is
zero and the correlation between the risk-free asset and any
risky asset i is zero we can adjust the formula
2 2
RF
2
port
) w 1 ( ) E(
i
o o =
Given the variance formula
2 2
RF
2
port
) w 1 ( ) E(
i
o o =
2 2
RF port
) w 1 ( ) E(
i
o o =
the standard deviation is

i
o ) w 1 (
RF
=
Therefore, the standard deviation of a portfolio that
combines the risk-free asset with risky assets is the
linear proportion of the standard deviation of the risky
asset portfolio.
Since both the expected return and the
standard deviation of return for such a
portfolio are linear combinations, a graph of
possible portfolio returns and risks looks
like a straight line between the two assets.
Portfolio Possibilities Combining the Risk-Free Asset
and Risky Portfolios on the Efficient Frontier
) E(
port
o
) E(R
port
Figure 9.1
RFR
M
C
A
B
D
Risk-Return Possibilities with Leverage
To attain a higher expected return than is
available at point M (in exchange for
accepting higher risk)
Either invest along the efficient frontier
beyond point M, such as point D
Or, add leverage to the portfolio by borrowing
money at the risk-free rate and investing in
the risky portfolio at point M
Portfolio Possibilities Combining the Risk-Free Asset
and Risky Portfolios on the Efficient Frontier
) E(
port
o
) E(R
port
Figure 9.2
RFR
M
The Market Portfolio
Because portfolio M lies at the point of
tangency, it has the highest portfolio
possibility line
Everybody will want to invest in Portfolio M
and borrow or lend to be somewhere on the
CML
Therefore this portfolio must include ALL
RISKY ASSETS
Because the market is in equilibrium, all
assets are included in this portfolio in
proportion to their market value
Because it contains all risky assets, it is a
completely diversified portfolio, which
means that all the unique risk of individual
assets (unsystematic risk) is diversified
away
Systematic Risk
Only systematic risk remains in the market
portfolio
Systematic risk is the variability in all risky
assets caused by macroeconomic variables
Systematic risk can be measured by the
standard deviation of returns of the market
portfolio and can change over time
Examples of Macroeconomic
Factors Affecting Systematic Risk
Variability in growth of money supply
Interest rate volatility
Variability in
industrial production
corporate earnings
and cash flow
How to Measure Diversification
All portfolios on the CML are perfectly
positively correlated with each other and
with the completely diversified market
Portfolio M
A completely diversified portfolio would have
a correlation with the market portfolio of
+1.00
Diversification and the
Elimination of Unsystematic Risk
The purpose of diversification is to reduce the
standard deviation of the total portfolio
This assumes that imperfect correlations exist
among securities
As you add securities, you expect the average
covariance for the portfolio to decline
How many securities must you add to obtain a
completely diversified portfolio?
Diversification and the
Elimination of Unsystematic Risk
Observe what happens as you increase the
sample size of the portfolio by adding
securities that have some positive
correlation
Number of Stocks in a Portfolio and the
Standard Deviation of Portfolio Return
Figure 9.3
Standard Deviation of Return
Number of Stocks in the Portfolio
Standard Deviation of
the Market Portfolio
(systematic risk)
Systematic Risk
Total
Risk
Unsystematic
(diversifiable)
Risk
The CML and the Separation Theorem
The CML leads all investors to invest in the M
portfolio
Individual investors should differ in position on
the CML depending on risk preferences
How an investor gets to a point on the CML is
based on financing decisions
Risk averse investors will lend part of the
portfolio at the risk-free rate and invest the
remainder in the market portfolio
Investors preferring more risk might borrow
funds at the RFR and invest everything in
the market portfolio
The decision of both investors is to invest in
portfolio M along the CML
(the investment decision)
The decision to borrow or lend to obtain a
point on the CML is a separate decision
based on risk preferences
(financing decision)
Tobin refers to this separation of the
investment decision from the financing
decision the separation theorem
A Risk Measure for the CML
Covariance with the M portfolio is the
systematic risk of an asset
The Markowitz portfolio model considers the
average covariance with all other assets in
the portfolio
The only relevant portfolio is the M portfolio
Together, this means the only important
consideration is the assets covariance with
the market portfolio
Because all individual risky assets are part of the M portfolio, an
assets rate of return in relation to the return for the M
portfolio may be described using the following linear model:
c + + =
Mi i i it
R b a R
where:
R
it
= return for asset i during period t
a
i
= constant term for asset i
b
i
= slope coefficient for asset i
R
Mt
= return for the M portfolio during period t
= random error term c
Variance of Returns for a Risky Asset
) R b a ( Var ) Var(R
Mi i i it
c + + =
) ( Var ) R b ( Var ) a ( Var
Mi i i
c + + =
) ( Var ) R b ( Var 0
Mi i
c + + =
risk ic unsystemat or portfolio market the
to related not return residual the is ) ( Var
risk systematic or return market to
related variance is ) R b ( Var that Note
Mi i
c
The Capital Asset Pricing Model:
Expected Return and Risk
The existence of a risk-free asset resulted in
deriving a capital market line (CML) that
became the relevant frontier
An assets covariance with the market
portfolio is the relevant risk measure
This can be used to determine an
appropriate expected rate of return on a
risky asset - the capital asset pricing model
(CAPM)
The Capital Asset Pricing Model:
Expected Return and Risk
CAPM indicates what should be the
expected or required rates of return on risky
assets
This helps to value an asset by providing an
appropriate discount rate to use in dividend
valuation models
You can compare an estimated rate of return
to the required rate of return implied by
CAPM - over/ under valued ?
The Security Market Line (SML)
The relevant risk measure for an individual
risky asset is its covariance with the market
portfolio (Cov
i,m
)
This is shown as the risk measure
The return for the market portfolio should
be consistent with its own risk, which is the
covariance of the market with itself - or its
variance:
2
m
o
Graph of Security Market Line
(SML)
) E(R
i
Figure 9.5
RFR
im
Cov
2
m
o
m
R
SML
The Security Market Line (SML)
The equation for the risk-return line is
) Cov (
RFR - R
RFR ) E(R
M i,
2
M
M
i
o
+ =
RFR) - R (
Cov
RFR
M
2
M
M i,
o
+ =
2
M
M i,
Cov
o
We then define as beta
RFR) - (R RFR ) E(R
M i i
| + =
) (
i
|
Graph of SML with
Normalized Systematic Risk
) E(R
i
Figure 9.6
) Beta(Cov
2
M
im/o
0 . 1
m
R
SML
0
Negative
Beta
RFR
Determining the Expected
Rate of Return for a Risky Asset
The expected rate of return of a risk asset is
determined by the RFR plus a risk premium
for the individual asset
The risk premium is determined by the
systematic risk of the asset (beta) and the
prevailing market risk premium (R
M
-RFR)
RFR) - (R RFR ) E(R
M i i
| + =
Assume: RFR = 6% (0.06)
R
M
= 12% (0.12)
Implied market risk premium = 6% (0.06)
Stock Beta
A 0.70
B 1.00
C 1.15
D 1.40
E -0.30
RFR) - (R RFR ) E(R
M i i
| + =
E(R
A
) = 0.06 + 0.70 (0.12-0.06) = 0.102 = 10.2%
E(R
B
) = 0.06 + 1.00 (0.12-0.06) = 0.120 = 12.0%
E(R
C
) = 0.06 + 1.15 (0.12-0.06) = 0.129 = 12.9%
E(R
D
) = 0.06 + 1.40 (0.12-0.06) = 0.144 = 14.4%
E(R
E
) = 0.06 + -0.30 (0.12-0.06) = 0.042 = 4.2%
In equilibrium, all assets and all portfolios of assets
should plot on the SML
Any security with an estimated return that plots above
the SML is underpriced
Any security with an estimated return that plots below
the SML is overpriced
A superior investor must derive value estimates for
assets that are consistently superior to the consensus
market evaluation to earn better risk-adjusted rates
of return than the average investor
Identifying Undervalued and
Overvalued Assets
Compare the required rate of return to the
expected rate of return for a specific risky
asset using the SML over a specific
investment horizon to determine if it is an
appropriate investment
Independent estimates of return for the
securities provide price and dividend
outlooks
Price, Dividend, and
Rate of Return Estimates
Stock (P
i
) Expected Price (P
t+1
) (D
t+1
) of Return (Percent)
A 25 27 0.50 10.0 %
B 40 42 0.50 6.2
C 33 39 1.00 21.2
D 64 65 1.10 3.3
E 50 54 0.00 8.0
Current Price Expected Dividend Expected Future Rate
Table 9.1
Comparison of Required Rate of Return
to Estimated Rate of Return
Stock Beta E(R
i
) Estimated Return Minus E(R
i
) Evaluation
A 0.70 10.2% 10.0 -0.2 Properly Valued
B 1.00 12.0% 6.2 -5.8 Overvalued
C 1.15 12.9% 21.2 8.3 Undervalued
D 1.40 14.4% 3.3 -11.1 Overvalued
E -0.30 4.2% 8.0 3.8 Undervalued
Required Return Estimated Return
Table 9.2
Plot of Estimated Returns
on SML Graph
Figure 9.7
) E(R
i
Beta
0 . 1
m
R
SML
0
.20 .40 .60 .80 1.20 1.40 1.60 1.80
-.40 -.20
.22
.20
.18
.16
.14
.12
R
m

.10
.08
.06
.04
.02
A
B
C
D
E
Calculating Systematic Risk:
The Characteristic Line
The systematic risk input of an individual asset is derived from
a regression model, referred to as the assets characteristic
line with the model portfolio:
c | o + + =
t M, i i t i,
R R
where:
R
i,t
= the rate of return for asset i during period t
R
M,t
= the rate of return for the market portfolio M during t
m i i i
R - R | o =
2
M
M i,
Cov
o
| = i
error term random the = c
Scatter Plot of Rates of Return
Figure 9.8
R
M

R
i

The characteristic
line is the regression
line of the best fit
through a scatter plot
of rates of return
The Impact of the Time Interval
Number of observations and time interval used in
regression vary
Value Line Investment Services (VL) uses weekly
rates of return over five years
Merrill Lynch, Pierce, Fenner & Smith (ML) uses
monthly return over five years
There is no correct interval for analysis
Weak relationship between VL & ML betas due to
difference in intervals used
Interval effect impacts smaller firms more
The Effect of the Market Proxy
The market portfolio of all risky assets must
be represented in computing an assets
characteristic line
Standard & Poors 500 Composite Index is
most often used
Large proportion of the total market value of
U.S. stocks
Value weighted series
Weaknesses of Using S&P 500
as the Market Proxy
Includes only U.S. stocks
The theoretical market portfolio should include
U.S. and non-U.S. stocks and bonds, real estate,
coins, stamps, art, antiques, and any other
marketable risky asset from around the world
Comparing Market Proxies
Calculating Beta for Coca-Cola using Morgan
Stanley (M-S) World Equity Index and S&P 500
as market proxies results in a 1.27 beta when
compared with the M-S index, but a 1.01 beta
compared to the S&P 500
The difference is exaggerated by the small sample
size (12 months) used, but selecting the market
proxy can make a significant difference
Here are the computations from page 303:
Computation of Beta of Coca-Cola
with Selected Indexes
Table 9.3
Return S&P 500 M-S World Coca-Cola
S&P M-S S&P M-S Coca- R
S&P
- E(R
S&P
) R
M-S
- E(R
M-S
) R
KO
- E(R
KO
)
Date 500 World 500 World Cola ( 1 ) ( 2 ) ( 3 ) ( 4 )
a
( 5 )
b
Dec-97 970.43 933.60
Jan-98 980.28 961.50 1.02 2.99 (2.91) -1.16 1.08 -3.40 3.94 -3.69
Feb-98 1049.34 1025.30 7.04 6.64 5.98 4.87 4.73 5.49 26.73 25.96
Mar-98 1101.75 1067.40 4.99 4.11 8.47 2.82 2.20 7.97 22.49 17.55
Apr-98 1111.75 1059.30 0.91 -0.76 1.93 -1.27 -2.66 1.43 -1.81 -3.82
May-98 1090.82 1061.80 -1.88 0.24 3.29 -4.06 -1.67 2.80 -11.35 -4.67
Jun-98 1133.84 1085.70 3.94 2.25 9.09 1.77 0.35 8.59 15.21 2.98
Jul-98 1120.67 1082.70 -1.16 -0.28 (5.85) -3.34 -2.18 -6.35 21.17 13.84
Aug-98 957.98 937.10 -14.52 -13.45 (19.10) -16.69 -15.35 -19.60 327.10 300.87
Sep-98 1017.01 952.40 6.16 1.63 (11.52) 3.99 -0.27 -12.01 -47.91 3.27
Oct-98 1098.67 1032.20 8.03 8.38 17.25 5.86 6.47 16.75 98.07 108.43
Nov-98 1163.63 1097.60 5.91 6.34 3.70 3.74 4.43 3.20 11.97 14.19
Dec-98 1229.23 1150.00 5.64 4.77 (4.37) 3.46 2.87 -4.87 -16.87 -13.97
2.17 1.90 0.50 Total = 448.74 460.93
Standard Deviation 6.18 5.63 9.87
Cov
KO,S&P
= 448.74/ 12 = 37.39 Var
S&P
= St.Dev.
S&P
2

= 38.19 Beta
KO,S&P
= 0.98 Alpha
KO,S&P
= -1.63
Cov
KO,M-S
= 460.93/ 12 = 38.41 Var
M-S
= St.Dev.
M-S
2

= 31.70 Beta
KO,M-S
= 1.21 Alpha
KO,M-S
= -1.81
Correlation coef.
KO,S&P
= 0.61 Correlation coef.
KO,M-S
= 0.69
a
Column (4) is equal to column (1) multiplied by column (3)
b
Column (5) is equal to column (2) multiplied by column (3)
Index
Average
Arbitrage Pricing Theory (APT)
CAPM is criticized because of the
difficulties in selecting a proxy for the
market portfolio as a benchmark
An alternative pricing theory with fewer
assumptions was developed:
Arbitrage Pricing Theory
Assumptions of
1. Capital markets are perfectly competitive
2. Investors always prefer more wealth to less
wealth with certainty
3. The stochastic process generating asset
returns can be presented as K factor model
(to be described)
Assumptions of CAPM
That Were Not Required by APT
APT does not assume
A market portfolio that contains all risky
assets, and is mean-variance efficient
Normally distributed security returns
Quadratic utility function
For i = 1 to N where:
= return on asset i during a specified time period
i k ik i i i i t t
b b b E R c o o o + + + + + = ...
2 1
R
i

= expected return for asset i
i k ik i i i i t t
b b b E R c o o o + + + + + = ...
2 1
R
i

E
i
= reaction in asset is returns to movements in a common
factor
i k ik i i i i t t
b b b E R c o o o + + + + + = ...
2 1
R
i

E
i
b
ik
factor
= a common factor with a zero mean that influences the
returns on all assets

i k ik i i i i t t
b b b E R c o o o + + + + + = ...
2 1
R
i

E
i
b
ik
k
o
factor
= a unique effect on asset is return that, by assumption, is
completely diversifiable in large portfolios and has a
mean of zero
i k ik i i i i t t
b b b E R c o o o + + + + + = ...
2 1
R
i

E
i
b
ik
k
o
i
c
factor
= a unique effect on asset is return that, by assumption, is
completely diversifiable in large portfolios and has a
mean of zero
= number of assets
i k ik i i i i t t
b b b E R c o o o + + + + + = ...
2 1
R
i

E
i
b
ik
k
o
i
c
N
Multiple factors expected to have an
impact on all assets:
k
o
Inflation
k
o
Inflation
Growth in GNP
k
o
Inflation
Growth in GNP
Major political upheavals
k
o
Inflation
Growth in GNP
Changes in interest rates
k
o
Inflation
Growth in GNP
And many more.
k
o
Inflation
Growth in GNP
And many more.
Contrast with CAPM insistence that only beta
is relevant
k
o
B
ik
determine how each asset reacts to this
common factor
Each asset may be affected by growth in
GNP, but the effects will differ
In application of the theory, the factors are not
identified
Similar to the CAPM, the unique effects are
independent and will be diversified away in
a large portfolio

i
c
APT assumes that, in equilibrium, the return
on a zero-investment, zero-systematic-risk
portfolio is zero when the unique effects are
diversified away
The expected return on any asset i (E
i
) can
be expressed as:
where:
= the expected return on an asset with zero systematic
risk where
ik k i i i
b b b E + + + + = ...
2 2 1 1 0
0
0 1
E E
i
= =
0 0
E =
1
= the risk premium related to each of the common
factors - for example the risk premium related to
interest rate risk
b
i
= the pricing relationship between the risk premium and
asset i - that is how responsive asset i is to this common
factor K
Example of Two Stocks
and a Two-Factor Model
= changes in the rate of inflation. The risk premium
related to this factor is 1 percent for every 1 percent
change in the rate
1
) 01 . (
1
=
= percent growth in real GNP. The average risk premium
related to this factor is 2 percent for every 1 percent
change in the rate
= the rate of return on a zero-systematic-risk asset (zero
beta: b
oj
=0) is 3 percent
2
) 02 . (
2
=
) 03 . (
3
=
3

= the response of asset X to changes in the rate of inflation
is 0.50
1 x
b
) 50 . (
1
=
x
b
= the response of asset Y to changes in the rate of inflation
is 2.00
) 50 . (
1
=
y
b
1 y
b
= the response of asset X to changes in the growth rate of
real GNP is 1.50
= the response of asset Y to changes in the growth rate of
real GNP is 1.75
2 x
b
2 y
b
) 50 . 1 (
2
=
x
b
) 75 . 1 (
2
=
y
b
= .03 + (.01)b
i1
+ (.02)b
i2
E
x
= .03 + (.01)(0.50) + (.02)(1.50)
= .065 = 6.5%
E
y
= .03 + (.01)(2.00) + (.02)(1.75)
= .085 = 8.5%
2 2 1 1 0 i i i
b b E + + =
Empirical Tests of the APT
Studies by Roll and Ross and by Chen
support APT by explaining different rates of
return with some better results than CAPM
Reinganums study did not explain small-
firm results
Dhrymes and Shanken question the
usefulness of APT because it was not
possible to identify the factors
Summary
When you combine the risk-free asset
with any risky asset on the Markowitz
efficient frontier, you derive a set of
straight-line portfolio possibilities
Summary
The dominant line is tangent to the
efficient frontier
Referred to as the capital market line
(CML)
All investors should target points along
this line depending on their risk
preferences
Summary
All investors want to invest in the risky
portfolio, so this market portfolio must
contain all risky assets
The investment decision and financing decision
can be separated
Everyone wants to invest in the market
portfolio
Investors finance based on risk preferences
Summary
The relevant risk measure for an
individual risky asset is its systematic
risk or covariance with the market
portfolio
Once you have determined this Beta
measure and a security market line, you
can determine the required return on a
security based on its systematic risk
Summary
Assuming security markets are not
always completely efficient, you can
identify undervalued and overvalued
securities by comparing your estimate
of the rate of return on an investment
to its required rate of return
Summary
The Arbitrage Pricing Theory (APT)
model makes simpler assumptions, and
is more intuitive, but test results are
mixed at this point
The Internet
Investments Online
www.valueline.com
www.barra.com
www.stanford.edu/~wfsharpe.com
End of Chapter 9
An Introduction to Asset
Pricing Models
Future topics
Chapter 10
Extensions of Capital Asset Pricing Model
Relaxation of Assumptions
Effect on SML and CML
Empirical Tests of the Theory

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