Can we use the beta in the market model as beta in CAPM? I am a little confused, since I think these 2 beta are different, but in some schweser problems they use the beta from market model as CAPM beta to calculate CAPM required rate of return. Thanks
Yes. Market Model: R = intercept + beta*Rm (where Rm and R are X and y variables) If I reduce X and Y variables by Rf then equation becomes: R - Rf = intercept + beta*(Rm - rf). Slope remains the same because you have adjusted X and Y variables with the same amount. So if we take expectation factor into the equation then we get CAPM: E® = Rf + beta*(E(Rm) - Rf) and E(intercept) = 0 under equillibrium conditions.
Have a look at schweser Practice Problem book 2 Practice Exam 1afternnoon session Q103 to 108. I am working on this question presently!! Has similar example