A Simple Approach to CAPM, Option Pricing and Asset Valuation

Topics:
Investment and Capital Markets
Tags:
Asset,
Finance,
Investment,
Marketing,
Pricing,
Pricing Strategy,
University Of Bologna,
Valuation
Source:
University of Bologna

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Overview: This paper presents a simple, intuitive approach to asset valuation in terms of marginal contributions to the characteristics (moments) of the market portfolio. Considering only the first two moments, mean and variance, the valuation equation is shown to correspond to Sharpe's CAPM.A risk-neutral pricing formula is easily derived, showing the equivalence between CAPM and the Black and Scholes' model. Extensions to higher moments like skewness and kurtosis are straightforward, providing a generalized valuation equation. Finally, the generalized equation is derived in a different, more rigorous way, as a result of a classical intertemporal general equilibrium model.

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Format: PDF | Size: 146KB | Date: Mar 2003 | Pages: 14

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