Portfolio Risk and Return: Part IILocked: included in All Access

Capital market theory and the CAPM: combining the risk-free asset with the market portfolio (the CML, lending and borrowing), why only systematic risk earns a return, return-generating models and beta, the CAPM and the security market line, the Sharpe ratio, Treynor ratio, M² and Jensen's alpha, and how the CAPM is used for capital budgeting, security selection and portfolio construction.

1. 1. The risk-free asset, the market portfolio and the CMLMixing a risk-free asset with the best risky portfolio gives a straight line of choices; when everyone agrees on expectations, that portfolio is the market and the line is the capital market line.Video · 7 minLocked: included in All Access14 min
2. 2. Lending, borrowing and leveraged portfolios on the CMLLeft of the market portfolio you lend at the risk-free rate; right of it you borrow to hold more than 100% in the market, raising both risk and expected return, and a higher borrowing rate bends the line down.Video · 6 minLocked: included in All Access11 min
3. 3. Systematic and nonsystematic riskTotal risk splits into market-wide risk that nobody can diversify away and company-specific risk that diversification removes, so only the market-wide part earns a reward.Video · 6 minLocked: included in All Access12 min
4. 4. Return-generating models, the market model and betaReturn-generating models link expected return to risk factors; with the market as the only factor, an asset's sensitivity to the market, its beta, measures its systematic risk.Video · 7 minLocked: included in All Access15 min
5. 5. The CAPM: assumptions, the SML and its limitsThe CAPM says expected return depends only on beta: $E(R_i) = R_f + \beta_i[E(R_m) - R_f]$, drawn as the security market line, which prices every asset and portfolio.Video · 6 minLocked: included in All Access15 min
6. 6. Sharpe ratio, Treynor ratio, M² and Jensen's alphaRisk-adjusted performance divides or adjusts excess return by risk: total risk for the Sharpe ratio and M², systematic risk for the Treynor ratio and Jensen's alpha.Video · 7 minLocked: included in All Access15 min
7. 7. Applying the CAPM: budgeting, security selection and portfolio buildingThe CAPM gives the required return for projects and assets; comparing your own return forecast with that required return (alpha) tells you what to buy, sell and how much to hold.Video · 7 minLocked: included in All Access14 min