In the cae of portfolio management and determining the best investments based on capm, we discuss the expected return ash the expected holding period return. What is the difference between this expected return and the expected return that is the market risk premium+risk free rate used in the CAPM? Where does the CAPM ER come from?
i think you are confised. the only one you need to know for level 1 are: 1) CAPM formula 2) expected return for a portfolio comprised of risk free and a risky asset (50%/50% for ex) 3) you can also back into the exp rtn thru the DDM model: e® = div yld + g
rolo, I don’t completely understand your question, but it may benefit you to draw a distinction between “the required rate of return,” as specified by CAPM and a variety of alternative methods you’ll learn in this program, vs. “expected return” or “expected holding period return.” The idea is that for an investment to be attractive, you’d like its expected return to be greater than or equal to the required rate of return, which can be interpreted as the opportunity cost of capital. If the expected return is less than the required rate of return, the investment does not offer adequate compensation for the level of risk you’d bear by investing in the asset. Alternatively, if the expected return exceeds the required return, there’s ex-ante alpha (positive, risk-adjusted excess return). Only time will tell whether that alpha is realized, and that’s called ex-post alpha. I hope this helps.
correct, if CAPM rtn is > than estimated return, you have an overpriced asset situation (UNDER the SML line) and you short that stock hard HPR = EV/BV - 1.
daj224 Wrote: ------------------------------------------------------- > HPR = EV/BV - 1. While not always applicable, don’t forget to include periodic cash flows like coupon payments or dividends in the HPR.
This was related to portfolio management regarding whether or not to purchase a given security. One would, according to schweser, calculate the expected holding period return, then calculate the required return and if HPR was greater you purchase the security. These were both written up as an expected return, but one was YOUR expected return and the other was an expected return based on capm.