Lecture Note Asset Prices This note covers the material on the APT CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT APT and Basic Framework Asset Prices Econ 497F Lecture Barry W Ickes The Pennsylvania State University Spring 2007 Arbitrage Pricing Theory Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT APT and Basic Framework No matter how theoretically appealing it may be even the most ardent supporters of the Capital Asset Pricing Model admit the model does not quite t reality Arbitrage Pricing Theory Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT APT and Basic Framework No matter how theoretically appealing it may be even the most ardent supporters of the Capital Asset Pricing Model admit the model does not quite t reality di cult to test the CAPM without data on the global wealth portfolio and the S P just won t do Arbitrage Pricing Theory Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT APT and Basic Framework No matter how theoretically appealing it may be even the most ardent supporters of the Capital Asset Pricing Model admit the model does not quite t reality di cult to test the CAPM without data on the global wealth portfolio and the S P just won t do We know that some of the most obvious implications of the CAPM are violated for instance we all hold di erent portfolios Arbitrage Pricing Theory Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT APT and Basic Framework No matter how theoretically appealing it may be even the most ardent supporters of the Capital Asset Pricing Model admit the model does not quite t reality di cult to test the CAPM without data on the global wealth portfolio and the S P just won t do We know that some of the most obvious implications of the CAPM are violated for instance we all hold di erent portfolios In the 1970 s nancial researchers took a di erent approach to the issue of identifying a discount rate for securities Arbitrage Pricing Theory Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT APT and Basic Framework No matter how theoretically appealing it may be even the most ardent supporters of the Capital Asset Pricing Model admit the model does not quite t reality di cult to test the CAPM without data on the global wealth portfolio and the S P just won t do We know that some of the most obvious implications of the CAPM are violated for instance we all hold di erent portfolios In the 1970 s nancial researchers took a di erent approach to the issue of identifying a discount rate for securities This time the security market line was the motivation for further theory Arbitrage Pricing Theory Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT APT and Basic Framework No matter how theoretically appealing it may be even the most ardent supporters of the Capital Asset Pricing Model admit the model does not quite t reality di cult to test the CAPM without data on the global wealth portfolio and the S P just won t do We know that some of the most obvious implications of the CAPM are violated for instance we all hold di erent portfolios In the 1970 s nancial researchers took a di erent approach to the issue of identifying a discount rate for securities This time the security market line was the motivation for further theory Use notion of arbitrage more directly Arbitrage Pricing Theory Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT APT and Basic Framework No matter how theoretically appealing it may be even the most ardent supporters of the Capital Asset Pricing Model admit the model does not quite t reality di cult to test the CAPM without data on the global wealth portfolio and the S P just won t do We know that some of the most obvious implications of the CAPM are violated for instance we all hold di erent portfolios In the 1970 s nancial researchers took a di erent approach to the issue of identifying a discount rate for securities This time the security market line was the motivation for further theory Use notion of arbitrage more directly The APT was developed by Stephen Ross Arbitrage Pricing Theory Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT APT and Basic Framework Note that even if the CAPM is untrue the security market line STILL remains an appealing diagram Arbitrage Pricing Theory Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT APT and Basic Framework Note that even if the CAPM is untrue the security market line STILL remains an appealing diagram The SML diagram helps us understand the Arbitrage Pricing Theory Arbitrage Pricing Theory Lecture Note Asset Prices CAPM CAPM and Beta Beta Basic Framework Stochastic Discount Factor Some uses of the Basic Price Equation Systematic Risk Equity Premium Risk Aversion and Asset Prices APT APT and Basic Framework Note that even if the CAPM is untrue the security market line STILL remains an appealing diagram The SML diagram helps us understand the Arbitrage Pricing Theory Like the CAPM APT argues asset prices are based upon the systematic risk exposure of the security as opposed to the total risk Arbitrage Pricing Theory Lecture Note Asset Prices CAPM CAPM and