NYU COR1-GB 2311 - The Intertemporal CAPM (16 pages)

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The Intertemporal CAPM



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The Intertemporal CAPM

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Pages:
16
School:
New York University
Course:
Cor1-Gb 2311 - Foundations of Finance

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Lecture 5 Foundations of Finance Lecture 5 The Intertemporal CAPM ICAPM a Multifactor Model I II III IV V VI VII VIII IX Reading ICAPM Assumptions When do individuals care about more than expected return and standard deviation Examples Tastes and Preferences with a Long term Investment Horizon Portfolio Choice Individual Assets CAPM vs ICAPM Numerical Example 0 Lecture 5 Foundations of Finance Lecture 5 The Intertemporal CAPM ICAPM a Multifactor Model I Reading A BKM Chapter 10 Section 10 4 B BKM Chapter 27 Section 27 2 II ICAPM Assumptions 1 Same as CAPM except can not represent individual tastes and preferences in E R R space When do individuals care about more than expected return and standard deviation A single period setting 1 returns are not normally distributed and individual utility depends on more than expected portfolio return and standard deviation B multiperiod setting 1 returns are not normally distributed and individual utility depends on more than expected portfolio return and standard deviation 2 individual preferences in the future depend on the state of the world at the end of this period 3 expected return and covariances of returns in future periods depends on the state of the world at the end of this period e g predictable returns III 1 Lecture 5 IV Foundations of Finance Examples A Predictable Returns 1 It has been empirically documented that expected stock returns over a period depend on variables known at the start of the period e g dividend yield on the S P 500 at the start of period t DP start t see Lecture 2 2 A high S P500 dividend yield at the start of this month implies high expected returns on stocks this month 3 So a high S P500 dividend yield at the end of this month implies high expected returns on stocks next month 4 Thus S P500 dividend yield at the end of this month is a state variable that individuals care about when making portfolio decisions today B Human capital value 1 An unexpectedly poorer economy at the end of the month



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