Transcript Investments: Analysis and Management

INVESTMENTS:
Analysis and Management
Second Canadian Edition
W. Sean Cleary
Charles P. Jones
Chapter 9
Capital Market Theory
Learning Objectives
• Describe how betas are estimated and how
beta is used.
Security Market Line
• Beta = 1.0 implies as
risky as market
• Securities A and B are
more risky than the
market
SML
E(R)
A
E(RM)
RF
B

C
• Security C is less risky
than the market

0
0.5
Beta > 1.0
1.0 1.5
BetaM
2.0
Beta < 1.0
Security Market Line
• Beta measures systematic risk


Measures relative risk compared to the market
portfolio of all stocks
Volatility different than market
• All securities should lie on the SML

The expected return on the security should be
only that return needed to compensate for
systematic risk
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