Market Model: E(Ri)=alpha(i) + beta(i)*E(Rm) CAPM: E(Ri)=Rf + beta(i)*(E(Rm)-Rf). I assume the two betas are the same thing. Then, what is this alpha(i)? It’s not Rf, I think.
market model is a regression and alpha(i) and beta(i) are regression coefficients. if market model and the CAPM are identical… alpha(i) + beta(i)*rm = rf+beta(i)(rm-rf) = (1-beta(i))*rf + beta(i)*rm so alpha(i) = (1-beta(i))*rf
Is alpha(i) just a by-product? Any use of it?
you are kidding on this one right?
try to hold what I have now.
Time decay is a big problem for me. too many alpha, beta, and zillions of r’s…
alpha is excess risk adjusted return my friend
deriv108 Wrote: ------------------------------------------------------- > try to hold what I have now. Time decay is a big > problem for me. > > too many alpha, beta, and zillions of r’s… yes try to hold what I have now. too many alpha, beta, and zillions of r’s… :))
I have also seen it it interpreted as the return on a security when the expected return on the market is zero.
yeah what he’s saying is what is the alpha term in the mkt model. not the normal alpha we think of. If I’m not mistaken, it is the E® calculated from the APT model. something like that, PM is a blur.
jut111 Wrote: ------------------------------------------------------- > yeah what he’s saying is what is the alpha term in > the mkt model. not the normal alpha we think of. > If I’m not mistaken, it is the E® calculated > from the APT model. something like that, PM is a > blur. jut, i think, if we are using this as the model "Market Model: E(Ri)=alpha(i) + beta(i)*E(Rm) " that alpha is risk adjusted excess return… the rest of the model is pretty much just capm which in totaal gives you your E®… all of alpha is not E®
yeah i’m confusing models. The output of the APT is alpha of a multi-factor model… I think. see pg. 383 Vol 5 last paragraph.
i think you are right… the APT seeks the arbitrage price for no risk, which would equal your alpha from the market model
There is an article on CAPM and regression test: www.elmarmertens.ch/LectureNoteCAPM.pdf In the middle of page 24, it says a(i,t)=Rf*(1-beta(i,M)), like CP said. It also mentions something like excess return. Any way, it seems too much for the exam…
deriv, trust me, you need to know that alpha is the excess risk adjsuted return… this is a very important fundamental to PM… i dont wanna see you lose that easy point if it were to come up
CFAdreams Wrote: ------------------------------------------------------- > deriv, > > trust me, you need to know that alpha is the > excess risk adjsuted return… this is a very > important fundamental to PM… i dont wanna see you > lose that easy point if it were to come up wouldnt the sharpe ratio be excess “risk adjusted” return? i thought alpha was just security return - benchmark return.
sharpe ratio is a measure of the amount of risk you are willing to take… alpha is the amount the security beats the index… but the security and index would have the same risk… If you can get more return for the same risk you have alpha I dont have the book in front of me, but i am fairly certain… please correct me if i have mispoken
that’s the problem, i don’t have the books with me either right now for true alpha to be generated yes, both the benchmark and security would need to have similar risk attributes. that said, i still probably wouldn’t call alpha risk-adjusted as far as this exam goes. would love to have other learned people clear this up.
cfadreams, can you elaborate more on this? What risk is it, excess to what?
i guess every security has a beta… lets say its the same as the market 1.0 so if the market is expected to return 12%, and your security is 15%. then there is a 3% difference. If your risk is both beat of 1.0, then you will take your security every time. You have an alpha of 3%.