CA2 CAPM with fixed prices

Three stocks trade at fixed prices, with no other side to trade against. Their end values depend on the state drawn.

Objective

Choose a portfolio across the states that may be drawn. Assessed on final wealth.

What it shows

• The capital asset pricing model: expected return against risk.
• A riskless rate, 12%, to compare every stock with.
• Taking a short position as a view.

Watch out for

• Holding one stock because its best state is the best of the three.
• Ignoring cash: 12% is the rate every stock has to beat.
• Comparing portfolios with different amounts of risk on one scale.

Who takes part

• Investor — every student. Chooses holdings in SA, SB and SC; short selling is allowed, and cash earns 12%.

Class size

Any size. Prices are fixed, so students do not depend on each other; twenty or more shows the spread of choices.