A Derivation of CAPM from a Measure of Manager's Performance Based on The Stochastic Discount Factor

Mathematics - Lecture/Discussion

Thursday, October 13, 2005
4:00 PM-5:00 PM

Morgan Hall
Room A

Professional Master's Program Seminar (Financial Mathematics). Luis Roman, Worcester Polytechnic Institute. Constructions of general equilibrium models allow determining relevant measures of risk for any asset and the relationship between expected return and risk for any asset when markets are in equilibrium. The simplest form of an equilibrium model is called the standard Capital Asset Pricing Model (CAPM). On the other hand, the stochastic discount factor (SDF) approach has been used to measure conditional performance of hedge funds. In this talk, we will present the mathematical concepts underlying the stochastic discount factor and define a new measure of manager's performance based on the SDF. Then, we will show how CAPM can be derived from this new measure.

Suggested Audiences: College, Adult

E-mail: ma-chair@wpi.edu

Last Modified: October 11, 2005 at 11:40 AM

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