Equity Markets and Portfolio Analysis

CHAPTER 9 The Capital Asset Pricing Model

Introduction

Like supply-and-demand models of economics, models for determining the equilibrium return on a security or a portfolio involve finding that unique return toward which the return naturally tends. The two most widely used models for determining the equilibrium return on an investment are the Capital Asset Pricing Model (CAPM), which was first discussed in Chapter 6, and the Arbitrage Pricing Theory (APT). The CAPM was the first general equilibrium model for determining an investment return, and it is based on the single-index model discussed in Chapter 8. The APT, on other hand, is based on a multifactor model. As we will see, both models are rooted in portfolio theory. In this chapter, ...