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Related Keywords: Equity Index, Strategies & Techniques
New Product Development: CME Group versus Peer Derivatives Exchanges
The Capital Asset Pricing Model (CAPM) determines the theoretical rate of return an investor expects from a financial asset. The model postulates the return of an asset must be equivalent to the risk free rate plus a risk premium attributable to the asset's sensitivity to the broad market's return.
If a financial asset's expected return is above the CAPM predicted theoretical return, the asset is underpriced and one might make profits with a long position. If the expected return is below the model predicted return, the asset is overpriced and one may make profits with a short position.
Of interest to us is the comparison of historical realized returns of the S&P 500 Select Sector Indices and returns indicated by the CAPM model over the same historical period. We will also look at the performance of trades conducted using CME E-Mini S&P 500 Select Sector Futures based on the perceived historical mispricing.
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