financial equilibrium model model

king_kong

looking at it now...don't know it, don't want to spend time on it. is this a crucial topic? a likely question/calculation? getting too tired to learn anything "new" right now.

bboo

yes I think it's important, ICAPM, singer-terhaar etc. I have a feeling integrated/segmented markets will be on the exam so thanks for reminding me.

Windjammer

I like it! Thanks for that last blurb.

dyga

if you know icapm and beta formulae then you can do any of these problems

starting with icapm:

req return = rf + B(Rp-Rm)
B = cov(asset,world market) / variance of market

substituting correlation in for covariance:

B = (correlation(asset, market) *std dev asset * std dev market) / variance of market
B = (correlation(asset, market) *std dev asset) / std dev market

so now,
req return = rf + [(correlation(asset, market) *std dev asset) / std dev market] * (Rp-Rm)

req return - rf = ERPi
(rp-rm/std dev market) = sharpe ratio

so we get

ERPi = correlation(asset,market)*std dev asset*sharpe ratio

now use this equation twice and plug in for degree of integration
if market is totally segmented, correction = 1 because asset and market are perfectly correlated

now that you have ERP, the required return = Rf + ERP

zwjy

Wow - Thanks for the input.

Unforseen

thanks for the reminder on this... forgot about the ERP calc.