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Consumption CAPM

Consumption CAPM

When we recently examined Intertemporal Capital Asset Pricing Model (I-CAPM), we understood it to be an extension of CAPM in which investors establish additional portfolios to hedge specific risks representing short-term idiosyncratic tastes and preferences. Typical examples of these specific risks include inflation, job loss, economic downturn, etc. The model is somewhat incomplete, in that it doesn’t specify how to arrive at the proper factors to quantify these additional hedges. Another approach, called the Consumption CAPM (C-CAPM) posits a single additional hedge portfolio based on consumption risk, which is a hedge against future consumption rates.

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Copyright 2011 Eric Bank, Freelance Writer
Intertemporal CAPM (I-CAPM)

Intertemporal CAPM (I-CAPM)

I-CAPM was first introduced in 1973 by Merton. It is an extension of CAPM which recognizes not only the familiar time-independent CAPM beta relationship, but also additional factors that change over time (hence “intertemporal”).

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Copyright 2011 Eric Bank, Freelance Writer
Downside CAPM

Downside CAPM

We have devoted a lot of blog space in the past examining the pros and cons of the Capital Asset Pricing Model (CAPM). The model predicts the amount of excess return (return above the risk-free rate) of an arbitrary portfolio that can be ascribed to a relationship (called beta[1]) to the excess returns on the underlying market portfolio.

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Copyright 2011 Eric Bank, Freelance Writer
Behavioral Portfolio Theory 1 – Safety First

Behavioral Portfolio Theory 1 – Safety First

ur survey of portfolio theories continues; we have already evaluated Modern Portfolio Theory, the Capital Asset Pricing Model and the Arbitrage Pricing Theory in earlier blogs, and now turn to a series of articles on Behavioral Portfolio Theory (BPT).

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Copyright 2011 Eric Bank, Freelance Writer