Week 3
CAPM and APT
From portfolio choice to asset pricing: the Capital Asset Pricing Model, the Security Market Line, and Arbitrage Pricing Theory — and how they hold up in practice.
Week 3 materials
Slides
What we cover
- Recap: what portfolio theory told us — and what it left unanswered
- The Capital Asset Pricing Model: from diversification to a theory of expected returns
- The Security Market Line: beta as the price of systematic risk
- CAPM vs. APT: one factor or many?
- In practice: what these models are actually used for
Put it to work
This week’s lab, PC Lab 2, takes these models to the data.