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Article

Teaching CAPM for a Pre-Finance Graduate Program at the STEM Undergraduate Level: Linear Algebra Perspective

1
Business Intelligence School, National Kaohsiung University of Science and Technology, Kaohsiung 82445, Taiwan
2
School of Economics, Guangxi University for Nationalities, Nanning 530006, China
*
Author to whom correspondence should be addressed.
Academic Editor: Miltiadis Chalikias
Mathematics 2021, 9(14), 1668; https://doi.org/10.3390/math9141668
Received: 12 June 2021 / Revised: 7 July 2021 / Accepted: 11 July 2021 / Published: 15 July 2021
(This article belongs to the Special Issue Mathematical and Statistical Methods Applications in Finance)
Students considering a masters in Finance Engineering or Artificial Intelligence in Finance are usually required to have an undergraduate background in science, technology, engineering, or mathematics (STEM). STEM students have a good capacity in mathematics and science, but they may not have studied financial theory. To facilitate the classroom teaching of the Capital Asset Pricing Model (CAPM) for STEM students, this paper seeks to expound on the essence of the theory starting at a two-asset framework. Adopting the concepts proposed by Merton (1972), this paper accomplishes the derivation by virtue of basic mathematical tools such as linear algebra, geometry, and statistics except for calculus. We show that the major aspects of Merton’s derivation of the CAPM for a universe of N assets may also be obtained in a two-asset world. Through the methods of this article, students will learn the in-depth theory of CAPM and its hands-on empirical tool. For example, students will realize that even if investors specify different threshold rewards, their different CAPMs will yield identical pricing for assets and portfolios. View Full-Text
Keywords: capital asset pricing model; benchmark portfolio; threshold portfolio; market portfolio; securities market line capital asset pricing model; benchmark portfolio; threshold portfolio; market portfolio; securities market line
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MDPI and ACS Style

Peng, C.-L.; Chen, W.-K.; Wei, A.-P. Teaching CAPM for a Pre-Finance Graduate Program at the STEM Undergraduate Level: Linear Algebra Perspective. Mathematics 2021, 9, 1668. https://doi.org/10.3390/math9141668

AMA Style

Peng C-L, Chen W-K, Wei A-P. Teaching CAPM for a Pre-Finance Graduate Program at the STEM Undergraduate Level: Linear Algebra Perspective. Mathematics. 2021; 9(14):1668. https://doi.org/10.3390/math9141668

Chicago/Turabian Style

Peng, Chi-Lu, Wen-Kuei Chen, and An-Pin Wei. 2021. "Teaching CAPM for a Pre-Finance Graduate Program at the STEM Undergraduate Level: Linear Algebra Perspective" Mathematics 9, no. 14: 1668. https://doi.org/10.3390/math9141668

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