ABSTRACT
The capital asset pricing model (CAPM) describes a relationship between the expected return on an asset and the expected return on a "market portfolio", which is assumed to be equivalent to the tangency portfolio. This chapter considers the market model, a statistical model for the relationship between observed asset returns and the observed returns on a type of market portfolio. The most well-known price-weighted index is the Dow Jones Industrial Average, which is based on the stocks of 30 large companies, in a variety of industries. The chapter considers estimation of the parameters of the market model. It considers the monthly excess returns on IBM stock. The false discovery rate (FDR) is an intuitively appealing concept in many applications, such as stock screening. The Treynor ratio rewards portfolios that have a large Sharpe ratio while having returns that have low correlation with the returns on the market index.
