Summary Review Notes

Summary of Chapter I

  • Geometric vs. arithmetic returns
  • Capital Market History
  • Equity Premium=8.5%
  • standard deviation as a measure of risk

Summary of Chapter II

  • Risk and Return
  • Correlation and diversification
  • The efficient frontier
  • The efficient frontier with a riskless asset

Summary of Chapter III

  • iso-utility curves
  • shortfall approach and Sharpe ratio
  • tangency portfolio

Summary of Chapter IV

  • What is tangency portfolio
  • CAPM equilibrium theory
  • “Birthday Cake” Proof

Summary of Chapter V

  • Correlations drive attractiveness of stock
  • The security market line
  • idiosyncratic risk is not prices
  • relationship between risk and return is linear
  • portfolio beta = weighted average of component betas

Summary of Chapter VI

  • APT motivated by SML
  • Arbitrage in expectations
  • APT does not restrict systematic risk to one factor

Summary of Chapter VII

  • Beta estimated via regression
  • Leverage affects beta
  • DCF using discount rate
  • M&A using discount rate
  • project choice

Summary of Chapter VIII

  • Liquid markets process information
  • expectations arbitrage happens fast
  • weak form = past prices
  • semi-strong form = current and past public information
  • strong form = all current and past information
  • technical analysis