(

----Rick aversion

-----Utility

CAL=

)
SML=
Single index Model:


r
i
r
f

i
+
i
(r
m
r
f
)+e
it




Esitmating the historical beta above is done by regression

this is the definition way.

Sharpe ratio maximising portfolio weightd with two risky assets (b and s) and
a risk free asset:
w
b

E(r
b
) r
f

s
2
[E(r
s
) r
f
]
b

bs
E(r
b
) r
f

s
2
[E(r
s
) r
f
]
b
2
E(r
b
) r
f
+E(r
s
) r
f

bs

Two index model in relised excess returns
R
i

i
+
iM
R
M
+
iTB
R
TB
+e
it

two factor SML (where TB is the second factor)
E(r
i
) r
f
+
iM
E(r
M
) r
f

+
iTB
E(r
TB
) r
f

Farma French three factor model in realized returns
r
i
r
f

i
+
m
(r
m
r
f
)+
HML
r
HML
+
SMB
r
SMB
+e
i


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information:
Weak-form efficiency Price
fully reflects all information
contained in trading history
(price, volume, etc)
Semi-strong-form
efficiency Price fully reflects all
public information on the firm
(accounting information, etc.)
Strong-form efficiency Price
reflects all public and private
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