Abstract: A CAPM View of VRMs

Employing a stochastic scenario approach and the capital asset pricing model, this study examines the position of shareholders in a hypothetical (modal) savings and loan association (SLA) holding a variable-rate mortgage (VRM) portfolio relative to the position of shareholders in an association holding fixed-rate mortgage (FRM) instruments. Because of the impossibility of accurately forecasting interest rates far into the future, the scenario approach was utilized to compare the two mortgage forms under simulated rising, falling and zero trend interest rate environments over a 30-year amortization period. Each scenario was generated by randomly selecting values from a distribution of first differences extracted from historical values of the Federal Home Loan Bank Average Cost of Funds Index.