Investment

Management
Capital Asset Pricing Model (CAPM) and
Arbitrage Pricing Theory (APT)

Prepared by
Lastario Hutomo
Politeknik STMI Jakarta
Referensi
￮ Charles P. Jones and Gerald R. Jensen, Investments: Analysis
and Management, 13th Edition, John Wiley & Sons

￮ Bodie, Zvi, A. Kane, and A.J. Marcus: Investment 10th Edition,

McGraw Hill

￮ Reilly, F.K., and Keith C.Brown, Investment Analysis & Portofolio

Management 10th Edition, South Western CENGAGE Learning

￮ Hartono, Jogiyanto: Teori Portofolio dan Analisis Investasi Edisi

Kesepuluh, BPFE Universitas Gajah Mada

￮ Fahmi, Irham: Manajemen Investasi Edisi 2, Salemba Empat

￮ Warsini, Sabar: Manajemen Investasi, Semesta Media 2

1
Capital Asset
Pricing Model
(CAPM)
 CAPM
￮ is a set of predictions

“
concerning equilibrium
expected returns on risky
assets.
￮ a model that relates the
required rate of return for a
security to its risk as
measured by beta
4
 CAPM
￮ Positive rather than normative

“
 Describes how investors could behave,
not how they should behave
￮ Focus on the equilibrium relationship
between the risk and expected return on
risky assets
￮ Builds on Markowitz portfolio theory
￮ Each investor is assumed to diversify his or
her portfolio according to the Markowitz
model
5
 CAPM
￮ is a theoretical economic model
that requires these assumptions:
￮ Assumes all investors:
￮ Individual investors are price
takers
￮ Use the same information to
generate an efficient frontier
￮ Have the same one-period time
horizon
￮ Can borrow or lend money at the
6
risk-free rate of return
 CAPM
￮ is a theoretical economic model
that requires these assumptions:
￮ No transaction costs, no income
taxes, no inflation
￮ No single investor can affect the
price of a stock
￮ Capital markets are in equilibrium
￮ Information is costless and
available to all investors
7
 Risk-Free Asset,
Borrowing, Lending
￮ Risk free asset
￮ No correlation with risky assets
￮ Usually proxied by a Treasury security
￮ Adding a risk-free asset extends and
changes the efficient frontier
￮ Risk-free investing is “Lending” because
investor lends money to issuer
￮ With borrowing, investor no longer
restricted to personal wealth
8
Risk-Free ￮ Risk-free asset can be
Lending/Borrowing combined with any
L portfolio in the efficient
set AB
B ￮ RF to T are lending
E(R) portfolios
T
￮ T to L are borrowing
Z X portfolios
RF ￮ Portfolios on line RF to L
A dominate all portfolios
below

Risk 9
 The New Efficient Set
￮ Risk-free investing and borrowing
creates a new set of risk-expected
return possibilities
￮ Addition of risk-free asset results in:
￮ A change in the efficient set
from an arc to a straight line
tangent to the original frontier
￮ Chosen (optimal) portfolio
depends on investor’s risk-
return preferences

10
 Capital Market Line (CML)
￮ Line from RF to L is Slope of CML is the market
L capital market price of risk for efficient
line (CML) portfolios, or the
M equilibrium price of risk in
E(RM) ￮ x = risk premium
=E(RM) - RF the market

x ￮ y = risk =  Relationship between risk

and expected return for
￮ Slope =x/y
RF portfolio P (Equation for
y =[E(RM) - RF]/M CML):
￮ y-intercept = RF

M E(RM )  RF
E(Rp )  RF  p
Risk M 11
Capital
Market
Line
(CML)

12
Market Portfolio
￮ Most important implications of CML
￮ The portfolio of all risky assets is the optimal risky
portfolio (called the market portfolio)

￮ The expected price of risk is always positive

￮ The optimal portfolio is at the highest point of

tangency between RF and efficient frontier

￮ All investors hold the same optimal portfolio of

risky assets 13
Market Portfolio
￮ All risky assets must be in portfolio, so it is completely
diversified

￮ Unobservable but approximated with portfolio of all

common stocks

￮ All securities included in proportion to their market value

14
Security Market Line
￮ CML only applies to markets in equilibrium and efficient
portfolios

￮ The security market line (SML) depicts trade-off

between risk and expected return for individual
securities and portfolios

￮ Under CAPM, all investors hold the market portfolio

￮ Relevant risk of any security is, therefore, its
covariance with the market portfolio 15
Security Market Line

16
 Standardized measure of
systematic risk

Beta (ß) Relative measure of risk:

risk of an individual stock
relative to the market
portfolio of all stocks
What does 
Covi, M
it tell us? Relates an asset’s
covariance with the market
 2
M
portfolio to the variance of
the market portfolio

17
 • Indicates the risk an asset will add to a
Beta (ß) well-diversified portfolio
• Measures an asset's nondiversifiable risk
• The slope of the line formed when as
What does asset’s returns are regressed against the
it tell us? market return
• A measure of the sensitivity of an asset’s
returns to changes in the market return
• Is the relevant risk measure for well-
diversified investors

18
  Beta > 1; security moves with the
market only more, security is riskier
Beta (ß) than average
0 < Beta < 1; security moves with the
market only less
Characteristics
Beta < 0; security moves counter to the
market

Market beta equals 1

Portfolio beta is a weighted average of
individual stock betas

19
 Company Beta
Amazon 1.35
McDonald’s 0.72
Kellogg Company 0.64
Biogen 0.59
Wal-Mart 0.87
Beta (ß) FirstEnergy 0.30
ConocoPhillips 0.74
Delta Air Lines 1.29
Goldman Sachs 1.35
Newmont Mining -0.03
Tiffany & Co. 2.01

20
CAPM’s Expected Return-Beta Relationship

• Required rate of return on asset (ki) is composed of

• Risk-free rate (RF )
• Risk premium (i [ E(RM) - RF ] )
• Risk premium adjusted for specific security
ki = RF + i [ E(RM) - RF ]
• The greater the systematic risk, the greater the required return

21
 Beta and the SML/CAPM
E(R) SML ￮ Beta = 1.0 equal
risk to market
A (average)
kM B
￮ Securities A
C and B are
kRF
more risky
than the
market
0 0.5 1.0 1.5 2.0 ￮ Beta > 1.0
Beta
￮ Security C is 22

less risky than

 Estimating the SML
￮ Treasury bond rate used to estimate RF

￮ Expected market return unobservable

￮ Often estimated using past market
returns and taking a mean value

￮ Estimating security betas is difficult

￮ Beta is only company-specific factor
in CAPM
￮ Beta estimation requires asset-
specific forecast
23
 SML & Under(Over)-Valued Assets
SML
ABC
•
E(R)
E(Rm)
•
XYZ LMN ki = RF + i [ E(RM) - RF ]
•
Rrf

-0.2 0.8 1.0 1.2

Beta (ß) 24
 CAPM/SML Implications
￮ Higher risk assets require higher returns

￮ Investors are only compensated for

bearing non-diversifiable risk

￮ Asset prices are not impacted by

diversifiable risk

￮ Undiversified investors have an inferior

risk-expected return trade-off

￮ Investors determine the risk they bear;

market determines their compensation
25
 Estimating Beta
￮ Market model
￮ Relates a stock’s return to the return
on the market, assumes a linear
relationship
￮ Produces an estimate of return for
any stock
Ri =i +i RM +εi

26
 How Accurate Are Beta Estimates?
￮ Betas change with a company’s
situation
￮ Estimating a future beta
￮ May differ from the historical beta

￮ RM represents the total of all

marketable assets in the economy
￮ Approximated with a stock market
index
￮ Approximates return on all
common stocks
27
 How Accurate Are Beta Estimates?
￮ Methods for estimating beta vary by
time period, market index, return
interval, etc.
￮ Therefore, estimates of beta vary

￮ Regression estimates of true  and 

from the characteristic line are
subject to error
￮ Portfolio betas more reliable than
individual security betas

28
 Tests of CAPM
￮ Assumptions are mostly unrealistic

￮ Empirical evidence has not led to

consensus

￮ Points widely agreed upon

￮ SML (CAPM) appears to be linear
￮ Intercept is generally higher than RF
￮ Slope of SML is generally less than
theory predicts
￮ It is likely that only systematic risk is
rewarded 29
2
Arbitrage
Theory
Arbitrage Pricing Theory
￮ Based on Law of One Price
￮ Two assets with identical future cash flow
streams cannot sell at different prices
￮ Equilibrium prices adjust to eliminate all
arbitrage opportunities
￮ Unlike CAPM, APT does not assume
￮ Single-period investment horizon, absence of
taxes, riskless borrowing or lending, mean-
variance decisions

31
Factors
￮ APT assumes returns generated by a
factor model that allows for more than
1 factor
￮ Factor Characteristics
￮ Each risk must have a pervasive
influence on stock returns
￮ Risk factors must influence
expected return and have non-zero
prices
￮ Risk factors must be unpredictable
to the market
32
APT Model
￮ Most important are the deviations of the
factors from their expected values
￮ Expected return is directly related to
sensitivity
￮ CAPM assumes only risk is sensitivity to
market
￮ Expected return-risk relationship for the
APT can be described as:
E(Ri) = RF +bi1 (factor 1 risk premium) + bi2
(factor 2 risk premium) +. . .+bin(factor
n risk premium)
33
3
LATIHAN
LATIHAN 1
Anda menginvestasikan dana sebesar
Hitunglah: Rp.1.000.000.000,- pada saham A sebanyak 40%
1. Expected Return dan saham B sebanyak 60%. Return kedua
Saham saham pada berbagai kondisi pasar sebagai
2. Expected Return berikut:
Portofolio Kondisi Pasar Probabilitas Return Saham A Return Saham B
3. Risiko Saham
Bullish 0,35 28% 35%
4. Covarian AB
Sedang 0,40 18% 20%
5. Korelasi AB
Bearist 0,25 2% -4%
6. Risiko Portofolio

35
LATIHAN 1
Kondisi Pasar Probabilitas Return Saham A Return Saham B

Bullish 0,35 28% 35%

Sedang 0,40 18% 20%

Bearist 0,25 2% -4%

Expected Return Saham

￮ E(RA)=(0,35x28%)+(0,40x18%)+(0,25x2%) = 17,50%

￮ E(RB)=(0,35x35%)+(0,40x20%)+(0,25x -4%) = 19,25%

Expected Return Portofolio

￮ E(RP)=(40%x17,5%)+(60%x19,25%) = 18,55%

36
LATIHAN 1 Kondisi Pasar Probabilitas Return Saham A Return Saham B

E(RA) = 17,50% Bullish 0,35 28% 35%

E(RB) = 19,25% Sedang 0,40 18% 20%

E(RP) = 18,55% Bearist 0,25 2% -4%

Risiko Saham
2 2 2
σA= [ 0,35𝑥 28% − 17,5% + 0,40𝑥 18% − 17,5% + 0,25𝑥 2% − 17,5% ]

= 0,009875
= 0,09937 atau 9,937%
2 2 2
σB= [ 0,35𝑥 35% − 19,25% + 0,40𝑥 20% − 19,25% + 0,25𝑥 −4% − 19,25% ]

= 0,02221875
= 0,149059 atau 14,906% 37
LATIHAN 1 Kondisi Pasar Probabilitas Return Saham A Return Saham B
E(RA) = 17,50%
Bullish 0,35 28% 35%
E(RB) = 19,25%
Sedang 0,40 18% 20%
E(RP) = 18,55%
Bearist 0,25 2% -4%
σA= 0,09937
σB= 0,149059
Risiko Saham
CovAB= [0,35x(28%-17,5%)x(35%-19,25%)]+[0,40x(18%-17,5%)x(20%-19,25%)]+
[0,25x(2%-17,5%)x(-4%-19,25%)]
= 0,01481251
Korelasi Saham A dan Saham B
0,01481251
ρAB = 0,09937𝑥0,149059 = 1 38
 LATIHAN 1 Kondisi Pasar Probabilitas Return Saham A Return Saham B
E(RA) = 17,50%
Bullish 0,35 28% 35%
E(RB) = 19,25%
Sedang 0,40 18% 20%
E(RP) = 18,55%
Bearist 0,25 2% -4%
σA= 0,09937
σB= 0,149059
CovAB= 0,01481251
ρAB = 1,00

σP= (40%)2 (0,09937)2 + 60% 2 (0,149059)2 + 2(1,00)(40%)(60%)(0,09937)(0,149059)

= 0,08439428 atau 8,439%

39
4
Tugas
Individu
Tulis Tangan
 INDIVIDU
Anda menginvestasikan dana sebesar
Hitunglah: Rp.1.000.000.000,- pada saham X dan saham Y.
1. Expected Return Return kedua saham pada berbagai kondisi pasar
Saham sebagai berikut:
2. Expected Return Kondisi Pasar Probabilitas Return Saham X Return Saham Y
Portofolio
1 0,20 15% -10%
3. Risiko Saham
2 0,30 2% 0%
4. Covarian XY
3 0,40 0% 5%
5. Korelasi XY
4 0,10 -12% 10%
6. Risiko Portofolio

41
5
Tugas
Kelompok
Word/Excel email:
LASTARIO@OUTLOOK.COM
Subject: ABO1_MI_19_KELOMPOK_
and Print Out
 Periode Saham A Saham B Saham C Saham D Saham E IHSG
KELOMPOK 1 3.700 4.100 2.050 1.400 5.000 1.960
2 2.975 4.050 2.200 1.250 5.200 2.040
3 3.100 4.525 2.300 1.275 5.350 2.340
4 3.850 4.250 2.600 1.600 4.850 2.500
5 4.150 4.475 3.000 2.100 4.700 2.550
Hitunglah:
1. Return Saham dan Return Pasar
2. Expected Return Saham dan Expected Return Pasar
3. Variance Saham dan Variance Pasar
4. Covariance masing-masing Saham dengan Pasar
5. Beta Saham
6. Jika Rf (risk free rate) adalah 2% tentukan berapa Expected Return
dengan menggunakan CAPM)
7. Berdasarkan hasil seluruh perhitungan, rekomendasikan 2 saham
“terbaik” untuk dijadikan portofolio 43
44