Capital Market Theory - CAPM and the Efficient Frontier › Key Parameters
Michael BrenndoerferDecember 14, 20251 min read
Quantitative FinanceAll chapters Part 9 of 15Portfolio Theory and Investment Analysis
Capital Market Theory - CAPM and the Efficient Frontier › Key ParametersOne section · Sections in this chapter11 / 14 ↓
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The key parameters for the CAPM implementation are:
- returns: Historical asset returns used to estimate beta and alpha.
- market_returns: Returns of the broad market index (e.g., S&P 500) used as the systematic risk factor.
- rf: Risk-free rate of return, used to calculate excess returns for both assets and the market.
- beta (β): Measure of systematic risk, calculated as the slope of the regression of asset excess returns on market excess returns.
- alpha (α): Measure of abnormal return, calculated as the intercept of the regression.