CAPM & Beta

What you'll learn

• ✓Compute beta
• ✓Apply the CAPM formula

Lessons

1. 🎢
   Same Average, Different Ride

   Two stocks. One number you've been missing.
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2. The Beta Zoo

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3. The CAPM Formula

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4. The Security Market Line

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5. Beta in the Wild

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6. Boss Round: CAPM Honestly

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Sources

All content is drawn from the sources below. We deliberately avoid unverified material.

• Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk (1964)
  William F. Sharpe, Journal of Finance, vol. 19, no. 3, pp. 425-442 · academic
  Sharpe's original CAPM paper. Source for the formula E[R] = Rf + β·(Rm − Rf) used throughout lessons 3, 4 and 6.
  https://www.jstor.org/stable/2977928
• The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets (1965)
  John Lintner, Review of Economics and Statistics 47, pp. 13-37 · academic
  Lintner's independent derivation of CAPM. Used to back the 'three independent fathers' framing in lesson 6.
  https://www.jstor.org/stable/1924119
• Equilibrium in a Capital Asset Market (1966)
  Jan Mossin, Econometrica 34, pp. 768-783 · academic
  Mossin's independent derivation of CAPM, completing the trio cited in the boss-round history match.
  https://www.jstor.org/stable/1910098
• The Cross-Section of Expected Stock Returns (1992)
  Eugene F. Fama and Kenneth R. French, Journal of Finance, vol. 47, no. 2, pp. 427-465 · academic
  The empirical critique used in lesson 6. Reported that beta alone has weak explanatory power once size and book-to-market are included, and proposed the three-factor model.
  https://www.jstor.org/stable/2329112
• A Critique of the Asset Pricing Theory's Tests (1977)
  Richard Roll, Journal of Financial Economics 4, pp. 129-176 · academic
  Roll's argument that the true CAPM market portfolio is unobservable and that any empirical test is a joint test of model and proxy. Source for the Roll critique in lesson 6.
  https://www.sciencedirect.com/science/article/pii/0304405X77900095
• Investments (Bodie, Kane, Marcus)
  McGraw-Hill · book
  Standard graduate textbook treatment of the CAPM, the Security Market Line, and the systematic-versus-idiosyncratic risk distinction. Backbone of lessons 3 and 4.
• Damodaran Online: Industry Betas and Cost of Equity Datasets
  Aswath Damodaran, NYU Stern School of Business · data
  Public dataset with annual industry betas used for the rough numbers in lesson 2 (utilities around 0.5 to 0.7, large-cap tech well above 1.5, gold-related sectors near zero or slightly negative).
  https://pages.stern.nyu.edu/~adamodar/
• S&P 500 and S&P Sector Index Annual Returns Factsheets
  S&P Dow Jones Indices · data
  Source for the historical annual return figures used in lesson 5: S&P 500 about minus 37 percent in 2008, Consumer Staples sector about minus 17 percent in 2008, S&P 500 about plus 16 percent in 2020 and minus 19 percent in 2022.
  https://www.spglobal.com/spdji/en/