In this document, I use the package ”gmm”. You can get it the usual way through R or though the development website RForge for a more recent version. For the latter, you can install it by typing the following in R: > install.packages("gmm", repos="http://R-Forge.R-project.org") The data I use come with the package and can be extracted as follows: > > > > library(gmm) data(Finance) R > > > >

Rm F) 0.70956 0.70956 0.70956 0.70956

They use a particular test for multivariate linear models. If we look at the p-values, it says that we don’t reject the hypothesis that all αi are zero. We can therefore reestimate the model without the intercept: > res2 res2

We can then look at the systematic and non systematic risk of each asset: > > > > + + sigm > > > > > > > a > >

b > > > > > D Chisq) 1 2 10 8.2292 0.6065

2

Zero-beta CAPM (Black)

The zero-beta CAPM is based on the properties of the portfolio frontier. One of them tells us that for each eﬃcient portfolio rp of risky assets, there exists a portfolio on the lower part of the portfolio frontier, rzp , which is uncorrelated with it. Its β deﬁned as Cov(rp , rzp )/V ar(rp ) is therefore 0. That’s why the model is called the zero-beta CAPM. Let γ = E(rzp ), then the theory says that E(Rt − γ) = βE(Rpt − γ) We can estimate the model asset by asset using nonlinear least square (NLS). The formula must be in the form r = γ(1 − β) + βRm . Let g and b be γ and β, we can compare the estimates of γ as follows: > > + + + + + + model > > > > >

...
The Capital Asset Pricing Model commonly known as CAPM defines the relationship between risk and the return for individual securities. CAPM was first published by William Sharpe in 1964. CAPM extended “Harry Markowitz’s portfolio theory” to include the notions of specific and systematic risk. CAPM is a very useful tool that has enabled financial analysts or the independent investors to evaluate the risk of a specific investment while...

...pricing model (CAPM)
Using the Capital Asset Pricing Model, we need to keep three things in mind. 1 there is a basic reward for waiting, the risk free rate. 2 the greater the risk, the greater the expected reward. 3 there is a consisted trade off between risk and reward.
In finance, It is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's...

...Is CAPM Beta Dead or Alive? Depends on How you Measure It
Jiri Novak*
* Uppsala University, Sweden E-mail: jiri.novak@fek.uu.se October 2007 Abstract: The CAPM beta is arguably the most common risk factor used in estimating expected stock returns. Despite of its popularity several past studies documented weak (if any) association between CAPM beta and realized stock returns, which led several researchers to proclaim beta “dead”. This paper shows...

...estimated to testify that the CAPM works in practice.
The capital asset pricing model (CAPM) provides us with an insight into the relationship between the risk of an asset and its expected return. This relationship serves two significant functions. First, it provides a benchmark rate of return for evaluating possible investments. Second, the model helps us to make an educated guess as to the expected return on asset that have not yet been traded in the...

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1 Calculate the expected return for A Industries which has a beta of 1.75 when the risk free rate is 0.03 and you expect the market return to be 0.11.
2 Calculate the expected return for B Services which has a beta of 0.83 when the risk free rate is 0.05 and you expect the market return to be 0.12.
3 Calculate the expected return for C Inc. which has a beta of 0.8 when the risk free rate is 0.04 and you expect the market return to be 0.12.
4 Calculate the expected...

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Ford Motor Company is the world's largest producer of cars and trucks combined. Ford has manufacturing, assembly or sales affiliates in 34 countries. Ford companies employed 337,800 people world-wide in 1996.
Ford has manufacturing facilities in 22 countries on 5 continents, with 87 plants in North America and 41 in Europe. Europe 1995, Ford's combined vehicle market share, at 12.2%, was the highest for eleven years, with three of the eight best-selling...

...The Capital Asset Pricing Model (CAPM):
What Is It? How Does It Work? And Does It Work Effectively?
In 1960, a doctoral candidate in economics at the University of California, Los Angeles by the name of William F. Sharpe needed a dissertation topic. After reading a 1952 paper on portfolio theory by Harry Markowitz entitled Portfolio Selection, Sharpe had found his idea. Markowitz's paper presented the notion of an "efficient frontier" of optimal investment that...