072 CAPM: What is beta?

• α_i is information unique to the stock
  • Maybe it's exploitable
  • E(α_i) = 0
• Assume:

• Use linear regression to find β_i and α_i

• Beta & correlation are different

• Two assets may be correlated but have different correlation
• Correlation goes from -1 to 1
• Correlation measures the width of the point cloud

• CAPM:

• r_i(t) = β_i*r_m(t) + α_i
• r_i(t) = β_i*r_m(t) + random
• E(α_i) = 0

• Active Portfolio Management View:

• r_i(t) = β_i*r_m(t) + α_i
• α_i is somewhat predictable, therefore exploitable