Blog

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.

Click here for reuse options!
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”).

Click here for reuse options!
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).

Click here for reuse options!
Copyright 2011 Eric Bank, Freelance Writer
Arbitrage Pricing Theory – Part Two

Arbitrage Pricing Theory – Part Two

Arbitrage Pricing Theory (APT) is a multi-factor model in which a series of input variables, such as macroeconomic indicators and market indices, are each assigned their own betas to determine the expected return of a target asset.

Click here for reuse options!
Copyright 2011 Eric Bank, Freelance Writer
Capital Asset Pricing Model, Part Two – Systematic Risk

Capital Asset Pricing Model, Part Two – Systematic Risk

We are reviewing the underlying assumptions made by the Capital Asset Pricing Model (CAPM). Recall from last time the assumption that returns are distributed normally (i.e. a bell-shaped curve) and how this fails to account for skew and fat tails. Today we’ll look at CAPM’s assumption that there is but a single source of priced systematic risk: market beta.

Click here for reuse options!
Copyright 2011 Eric Bank, Freelance Writer