A Simple Approach to CAPM, Option Pricing and Asset Valuation

Cesari, Riccardo ; D'Adda, Carlo (2003) A Simple Approach to CAPM, Option Pricing and Asset Valuation. DOI 10.6092/unibo/amsacta/630.
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Abstract

In this paper we propose 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.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Cesari, Riccardo
D'Adda, Carlo
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DOI
Deposit date
17 Jun 2004
Last modified
17 Feb 2016 13:59
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