A New Approach for Estimating the Capital Market Line
Abstract
The purpose of this study is to develop and empirically test a procedure to more effectively use the Capital Asset Pricing Model (CAPM) in the evaluation of securities. The CAPM is a conceptual tool used in estimating the required rate of return for all risky assets. It combines various portfolio possibilities of a risk-free asset and risky assets.
The population of efficient return and risk combinations is represented by a straight line referred to as the CML. Two problems associated with the estimation of this linear relationship are: 1) The expected return and standard deviation of return used as a risk measure is not instantaneously observable - historical data is relied upon. 2) The CAPM is a static model a - snapshot of an expected risk/return relationship at one point in time. The dynamic consequences are not well understood because of a stable risk/return relationship is implicitly assumed when historical data is relied upon as a surrogate for current expectations.
The solution attempt for these problems lies in recognizing that we can obtain superior estimates of the expected standard deviation of the market on a daily basis, without relying on historical data.
Description
Program year: 1984/1985Digitized from print original stored in HDR
Subject
Capital Asset Pricing Modelsecurity evaluation
return and risk combinations
historical data
dynamic consequences
standard deviation
Citation
Simon, Leslie Ann (1985). A New Approach for Estimating the Capital Market Line. University Undergraduate Fellow. Available electronically from https : / /hdl .handle .net /1969 .1 /CAPSTONE -RotheK _1982.