Capital Ideas — Chapter 10: Risky Business

1. 1. Modigliani and Miller's theory demonstrates that the market, not corporate managers, fixes the value of the corporation.
2. 2. Jack Treynor developed a method to predict the risk premium, the extra return investors demand over the risk-free rate for holding risky assets.
3. 3. William Sharpe independently developed the Capital Asset Pricing Model (CAPM), which uses beta to measure systematic risk.
4. 4. CAPM implies that unsystematic risk (company-specific) does not affect stock value because it can be diversified away.
5. 5. The market portfolio, as per CAPM, is the super-efficient portfolio that all rational investors should hold.
6. 6. Treynor's 1965 Harvard Business Review article on mutual fund performance measurement was a classic, relating returns to portfolio volatility.
7. 7. CAPM faced initial rejection and skepticism from practitioners, who saw beta as a mystery or threat.
8. 8. CAPM has limitations: it assumes rational investors, no taxes or transaction costs, and a single time period.
9. 9. Arbitrage Pricing Theory (APT) by Stephen Ross improves on CAPM by considering multiple economic factors and avoiding rigid assumptions.