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Capital market theory and the Capital Asset Pricing Model

Portfolio management / portfolio construction · Lesson 3 of 4

Lesson 3 of 4

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Lesson 3 of 4 · Portfolio management / portfolio construction

Capital market theory and the Capital Asset Pricing Model

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Describe the assumptions of mean-variance portfolio theory and the characteristics of efficient portfolios and the efficient frontier.
Explain the Markowitz framework, the global minimum-variance portfolio, and the efficient frontier’s role in portfolio choice.
Describe the implications of adding a risk-free asset, including the capital allocation line, the optimal risky portfolio, and the capital market line.

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Define, calculate, and interpret beta as a measure of systematic risk.

Use the Capital Asset Pricing Model to calculate required return and evaluate whether an asset is underpriced, fairly priced, or overpriced relative to the security market line.

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