Capital Asset Pricing Model: Theory and Applications

This lecture covers the Capital Asset Pricing Model (CAPM), discussing the risk-return trade-off, the market portfolio, the Security Market Line (SML), and the Security Characteristic Line (SCL). It explains how to estimate betas, the Vasicek shrinkage estimator, and applications of the CAPM in portfolio choice, security selection, and performance evaluation. The lecture also explores discounting risky cash-flows, performance evaluation using the Security Characteristic Line, and provides an example of evaluating the Magellan Fund. Empirical evidence on the CAPM is presented, showing the efficient frontier and average annualized monthly return versus beta for value-weight portfolios.