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PORTFOLIO MANAGEMENT
• Risk free rate: Risk free rate is the return on the security that
is free from default risk and is unrelated with returns from
anything else in the economy.
• Market risk premium: The risk premium used in the CAPM is
typically based on historical data. It is calculated as the
difference between the average return on stocks and the
average risk-free rate
• Beta: The beta of an investment is the slope of the following
regression relationship:
Rit = i +βi RMT +eit
where:
• return on investment I
• return on the market portfolio
• intercept of the linear regression relationship between RMT
and Rit