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1

CAPM Extensions - Zero-Beta CAPM

CAPM equation results

the CAPM equation results when investors face restrictions on borrowing 

 

2

CAPM Extensions - Zero-beta CAPM

The equation results when investors are subject to borrowing extensions 

  • Investors who would otherwise want to lever their portfolios but cannot will increase (decrease) their weight in high beta (low beta) stocks;
  • As a result, prices of high beta stocks will rise, causing their risk premiums to fall; and,
  • As a result, the SML will be flatter than that of the simple CAPM.

3

Zero-beta model

characteristics of efficient frontier portfolios

1. Any portfoio that is a combo of 2 frontier portfolios is itself on the efficient frontier i.e. a portfolio made up of efficient portfolios is itself efficient

2. Every portfolio on the efficient frontier, except the global minimum-variance portfolio, has a companion , zero-beta portfolio on the bottom (inefficient) half of the frontier with which it is uncorrelated

4

CAPM Extensions - Labour Income and Non Traded Assets