Investments

1
Investments

• Thu Apr 23 (8-12) Finish Sharpes Chapter 4.
  Highly relevant for Hand-In 2, which has now
  posted.
• Fri Apr 24 (8-(if need be)12) Sharpes Chapter 5
  on outside positions.
• Reasons young people should more stock.
• Why bankruptcy protection hurts all.
• Hand-back of and comments to Hand-In 1.

2

• Sharpe 4.11 The basic pricing equation and how
  that leads to various (CAPM-like) pricing
  equations something that explains expected
  returns on assets.
• Generally Note the order at which we do things
  First we find the equlibrium (run the
  experiment), then we analyze the outcome. We
  dont force things on in advance.

3

• Assuming quadratic utility (individual and hence
  aggregate or approximate on aggregate) we get
  the usual CAPM
• where

4

• Assuming constant relative risk aversion b we get
  a similar equation, except we have to use a
  power beta
• Note that this model
• is new to you
• has empirically testable differences to usual
  CAPM (at least in theory)

5

• For the rest of today we will circle around these
  pricing equations
• Security market line alpha Sec. 4.17-18
• Capital market line Sharpe ratio S. 4.19
• Representative agents Sec. 4.20
• Ex ante vs. ex post. Or This stuff is
  imprecisely estimated. Sec. 4.21