The Capital Asset Pricing Model

This book evaluates the development of Modern Portfolio Theory (MPT) based on the Sharpe CAPM and Ross four-factor APT, underpinned by Modigliani and Miller’s “law of one price”. Today anybody with appropriate software and a reasonable financial education can model risky investment portfolios. But one lesson from the 2007 banking and 2010 euro crises is that computer driven models can be so complex that investors may not interpret their results correctly. Returning to first principles, we therefore explain why MPT is only a guide to action and program trading is no substitute for human judgement. Investors should always understand the models that underpin their analyses.

1. The Beta Factor Introduction
1.1 Beta, Systemic Risk and the Characteristic Line
1.2 The Mathematical Derivation of Beta
1.3 The Security Market Line
Summary and Conclusions
Review Activity
Selected References

2. The Capital Asset Pricing Model (CAPM) Introduction
2.1 The CAPM Assumptions
2.2 The Mathematical Derivation of the CAPM
2.3 The Relationship between the CAPM and SML
2.4 Criticism of the CAPM
Review Activity
Summary and Conclusions Selected References

3. Capital Budgeting, Capital Structure and the CAPM Introduction
3.1 Capital Budgeting and the CAPM
3.2 The Estimation of Project Betas
3.3 Capital Gearing and the Beta Factor
3.4 Capital Gearing and the CAPM
3.5 Modigliani-Miller and the CAPM
Review Activity
Summary and Conclusions
Selected References

4. Arbitrage Pricing Theory and Beyond Introduction
4.1 Portfolio Theory and the CAPM
4.2 Arbitrage Pricing Theory (APT)
Summary and Conclusions
Selected References

Appendix

With an eclectic record of University teaching, research, publication, consultancy and curricula development, underpinned by running a successful business, Alan has been a member of national academic validation bodies and held senior external examinerships and lectureships at both undergraduate and postgraduate level in the UK and abroad.

With increasing demand for global e-learning, his attention is now focussed on the free provision of a financial textbook series, underpinned by a critique of contemporary capital market theory in volatile markets, published by bookboon.com.

To contact Alan, please visit Robert Alan Hill at www.linkedin.com.