FRM(CAPM, CML, SML, Beta)

Since I really want to start the FRM studying earlier, but with no motivation ( Kaohsiung is really the place for relax); therefore, I would like to share the materials I learned here to record my process, and see what is the opinion of yours on these stuff. You might think these boring, but I don't give a damn haha!

My first setback are CAPM, CML, and SML, which we had learned in the financial management class. Because my FM professor sucks, I learned finance poorly, in the end, I have to restart those all over again myself. It's my karma......

• CAPM(Capital Asset Pricing Model)

Assumptions: /I reorganize the materials myself

1. Perfect market assumptions: no transaction cost, no taxes on trading, the securities can be infinitely divided.

2. Investors are price takers whose individual buy and sell have no impact on assets price.

3. Investors' utility function are based solely on expected portfolio return and risk (Mean-Variance).

4. Investors can borrow and lend unlimited amount at the risk-free rate.

5. Investors are only concentrate about the returns and risk over the single period (single period is all the same for all investors).

6. Homogeneous expectation: Investors have the same forecast of expected return, variance, and covariance. 

6. All assets are marketable, including human capital.

8. Unlimited short-selling is allowed.

    Briefly, 

    1. no transaction cost, taxes, infinitely divided securities

    2. price taker

    3. utility function based on Mean-Variance 

    4. unlimited amount borrow and lend on risk-free rate

    5. homogeneous expectation

    6. all assets marketable

    7. unlimited short-selling

Wanna talk about the CAPM, you cannot skip the CML.

• CML(Capital Market Line)

                                            (photoed form Schweser Study Notes)

The equation for the CML is:

                                       (photoed from Schweser Study Notes)

- The slope of the CML is also called the market price of risk and equals the reward-to-risk ratio(Sharpe ratio).

With CML equation, we can derive CAPM equation.

                                         (photoed from Schweser Study Notes)

CAPM, SML, CML - Part I

http://www.youtube.com/watch?v=13EpJk0gtxo&feature=related

CAPM, SML, CML - Part II

http://www.youtube.com/watch?v=EjgXzbMLyoA&feature=relmfu

(editing)