Modern Portfolio Theory and the CAPM
Free GARP FRM Part I lesson in Foundations of Risk Management. 18 min read, ~2,630 words.
Efficient frontier = portfolios that minimize variance at each level of expected return (Markowitz quadratic optimization); diversification works through covariance, not return averaging. CAPM:. Single-factor model pricing systematic risk only; when the asset's expected return equals the market's. CML plots efficient portfolios in (return, total-risk) space; SML plots all assets...
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What this lesson covers
- Content
- Example 1
- Example 2
- Common Mistakes
- Check Your Understanding
- Exam Shortcuts
Learning objectives
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