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Chapter 8: The Capital Asset Pricing...
Learning objectives
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The ideas, frameworks and theories surrounding the relationship between the returns on a security and its risk are pivotal to most of the issues covered by the book and website. At times it may seem that this chapter marches you up to the top of the hill only to push you down again. But remember, sometimes what you learn on a journey and what you see from new viewpoints are more important than the ultimate destination. By the end of this chapter the reader should be able to:
- describe the fundamental features of the Capital Asset Pricing Model (CAPM);
- show an awareness of the empirical evidence relating to the CAPM;
- explain the key characteristics of multi-factor models, including the Arbitrage Pricing Theory (APT) and the three-factor model;
- express a reasoned and balanced judgement of the risk-return relationship in financial markets.
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