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Chapter 07 - Capital Asset Pricing and Arbitrage Pricing Theory
CHAPTER SEVEN
CAPITAL ASSET PRICING AND ARBITRAGE PRICING
THEORY
1. The Capital Asset Pricing Model
PPT 7-2 through PPT 7-12
The introduction of the CAPM starts with an overview of the importance of the model and the
assumptions that underlie it. The implications or conditions that will result from the CAPM are
used to illustrate a security’s alpha. Portfolio betas are simple weighted averages of the
component security betas and are easy to calculate.
7-1
2. The CAPM and Index Models
PPT 7-13 through PPT 7-21
Development of an index model and an example security characteristic line (SCL) are provided.
3. CAPM and the Real World
PPT 7-22
This brief section gives some background about some of the main conclusions that can be drawn
from studies of the real world applicability of the CAPM. Although the model cannot be directly
4. Multifactor Models and the CAPM
PPT 7-23 through PPT 7-26
7-2
5. Arbitrage Pricing Theory
PPT 7-27 through PPT 7-35
After laying the conceptual groundwork and defining terms, the concept of arbitrage pricing for
