Capital Market Theory

1 / 5

# Capital Market Theory - PowerPoint PPT Presentation

Capital Market Theory. Outline. Overview of Capital Market Theory Assumptions of Capital Market Theory Development of Capital Market Theory Risk-Return Combination Risk-Return Possibilities with Leverage. From Portfolio Theory to Capital Market Theory.

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

## Capital Market Theory

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

### Capital Market Theory

Outline
• Overview of Capital Market Theory
• Assumptions of Capital Market Theory
• Development of Capital Market Theory
• Risk-Return Combination
• Risk-Return Possibilities with Leverage
From Portfolio Theory to Capital Market Theory
• Capital market theory builds on portfolio theory and develops a model for pricing all risky assets
• The concept of a risk-free asset is critical to the development of capital market theory
• The expected return on a risk-free asset is entirely certain and the standard deviation is zero
• Covariance of a risk-free asset with a risky asset is zero
Expected Return of a Portfolio that contains a risk-free asset and a risky asset

E(Rp) = w x E(rA) + (1-w) x rf

• Standard Deviation of two asset portfolio
• Expected return and the standard deviation of expected return for such a portfolio are linear combinations
• A graph of possible portfolio returns and risks will be a straight line between the two assets
Risk-return possibilities with Leverage
• How can an investor attain a higher expected return than is available at point M in the graph?
• Borrowing and lending possibilities and capital market line
• Risk-less asset created lending and borrowing possibilities and a set of expected return and risk that did not exist before