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CAPM The capital asset pricing model (CAPM) states that the rate of return of a security is proportional to its risk. Specifically, the theory states
CAPM
The capital asset pricing model (CAPM) states that the rate of return of a security is proportional to its risk. Specifically, the theory states that: Im-r where r, is the rate of return of the security j rris the risk-free rate, i.e., the rate of return is guaranteed (fixed). The risk-free rate is usually surrogated by the interest rate of government issued bonds m is the rate of return of the 'market portfolio' a The data file shows the monthly returns of the risk-free rate, rf, the market portfolio, rm, and the security j, rj. Estimate P, from the data, 1 with intercept:= aj + ,(rm-rf) and 11 without intercept:=AX,,-7) Which model is supported by the data? How do you interpret the estimate ofP; in (a)? b estimate of B, in (a)
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