Book Image

Introduction to R for Quantitative Finance

Book Image

Introduction to R for Quantitative Finance

Overview of this book

Introduction to R for Quantitative Finance will show you how to solve real-world quantitative fi nance problems using the statistical computing language R. The book covers diverse topics ranging from time series analysis to fi nancial networks. Each chapter briefl y presents the theory behind specific concepts and deals with solving a diverse range of problems using R with the help of practical examples.This book will be your guide on how to use and master R in order to solve quantitative finance problems. This book covers the essentials of quantitative finance, taking you through a number of clear and practical examples in R that will not only help you to understand the theory, but how to effectively deal with your own real-life problems.Starting with time series analysis, you will also learn how to optimize portfolios and how asset pricing models work. The book then covers fixed income securities and derivatives such as credit risk management.
Table of Contents (17 chapters)
Introduction to R for Quantitative Finance
Credits
About the Authors
About the Reviewers
www.PacktPub.com
Preface
Index

Capital Asset Pricing Model


The first type of model explaining asset prices uses economic considerations. Using the results of the portfolio selection presented in the previous chapter, the Capital Asset Pricing Model (CAPM) gives an answer to the question asking what can be said of the market by aggregating the rational investors' decisions and, also, by what assumption the equilibrium would evolve. Sharpe (1964) and Lintner (1965) prove the existence of the equilibrium subject to the following assumptions:

  • Individual investors are price takers

  • Single-period investment horizon

  • Investments are limited to traded financial assets

  • No taxes and no transaction costs

  • Information is costless and available to all investors

  • Investors are rational mean-variance optimizers

  • Homogenous expectations

In a world where these assumptions are held, all investors will hold the same portfolio of risky assets, which is the market portfolio. The market portfolio contains all securities and the proportion of each security...