1. INVESTMENTS: Analysis and Management Second Canadian Edition INVESTMENTS: Analysis and Management Second Canadian Edition W. Sean Cleary Charles P. Jones

2. Chapter 9 Capital Market Theory

3. Describe how betas are estimated and how beta is used. Learning Objectives

4. Beta = 1.0 implies as risky as market Securities A and B are more risky than the market  Beta > 1.0 Security C is less risky than the market  Beta < 1.0 A B C E(R M ) RF 01.02.00.51.5 SML Beta M E(R) Security Market Line

5. Beta measures systematic risk  Measures relative risk compared to the market portfolio of all stocks  Volatility different than market All securities should lie on the SML  The expected return on the security should be only that return needed to compensate for systematic risk Security Market Line

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