Risk and Return Trade-Off Analysis

The following sections are included:

• Introduction

• Capital Market Line, Efficient–Market Hypothesis and Capital Asset Pricing Model

  • Lending, Borrowing, and the Market Portfolio

  • The Capital Market Line

  • The Efficient-Market Hypothesis

  • Weak-Form Efficient-Market Hypothesis

  • Semistrong-Form Efficient-Market Hypothesis

  • Strong-Form Efficient-Market Hypothesis

  • The Capital Asset Pricing Model

• The Market Model and Beta Estimation

• Empirical Evidence for the Risk–Return Relationship

• Why Beta is Important in Financial Management

• Systematic Risk Determination

  • Business Risk and Financial Risk

  • Other Financial Variables

  • Capital Labor Ratio

  • Fixed Costs and Variable Costs

  • Market-Based versus Accounting-Based Beta Forecasting

• Some Applications and Implications of the Capital Asset Pricing Model

  • Applications

• Liquidity and Capital Asset Pricing Model

• Arbitrage Pricing Theory

• Intertemporal CAPM

• Summary

• Questions and Problems

• Appendix 8.A. Mathematical Derivation of the Capital Asset Pricing Model

• Appendix 8.B. Arbitrage Pricing Model

• References for Chapter 8

• Note