Python Data Analysis Cookbook

Exploring risk and return

Beta in finance is the slope of a linear regression model involving the returns of the asset and the returns of a benchmark, for instance the S&P 500 index. The model is defined as follows:

According to the Capital Asset Pricing Model (CAPM), beta is a measure for risk. The expected return is given by the average of the returns. If we plot betas and expected returns for various securities, we obtain the security market line (SML) for the corresponding market. The intercept of the SML gives the risk-free rate, a return we should theoretically receive without taking any risk. In general, if an asset doesn't lie on the SML, ...