Lesson plan
Intertemporal CAPM
In mathematical finance, the intertemporal capital asset pricing model, or ICAPM, created by Robert C. Merton, is an alternative to the capital asset pricing model (CAPM). It is a linear factor model with wealth as state variable that forecasts changes in the distribution of future returns or income. In the ICAPM investors are solving lifetime consumption decisions when faced with more than one uncertainty. The main difference between ICAPM and standard CAPM is the additional state variables that acknowledge the fact that investors hedge against shortfalls in consumption or against changes in the future investment opportunity set.
Article summary
In mathematical finance, the intertemporal capital asset pricing model, or ICAPM, created by Robert C. Merton, is an alternative to the capital asset pricing model (CAPM). It is a linear factor model with wealth as state variable that forecasts changes in the distribution of future returns or income. In the ICAPM investors are solving lifetime consumption decisions when faced with more than one uncertainty. The main difference between ICAPM and standard CAPM is the additional state variables that acknowledge the fact that investors hedge against shortfalls in consumption or against changes in the future investment opportunity set.
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Discussion questions
- Summarise the article in your own words. Which single claim would you verify first, and why?
- Which claim in this article is most likely to be revised as the sources update? How would you check its current status?
- If two sources disagreed about one of these facts, what would you need in order to trust one over the other?
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