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”).
Click here for reuse options! 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.
Click here for reuse options! Having previously discussed them, let’s compare them. How does the Arbitrage Pricing Theory (APT) stack up against the Capital Asset Pricing Model (CAPM)?
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We continue our journey into the wonderland of alpha, taking up with leverage and the Efficient Frontier. We documented last time that a mix of a risky portfolio and the risk-free rate (Rf) yields a linear Capital Asset Line (CAL) within risk-return space. When the mix is varied to decrease the amount of Rf, the riskiness and expected return of the portfolio increase. The mirror image occurs as we increase the relative percentage of Rf in the portfolio mix. We can even borrow at the risk-free rate to purchase additional risky assets for our portfolio – one form of a practice known as leverage. Continue reading “Modern Portfolio Theory – Part Two” »