Risk & Return II
6-1
,Learning Objectives
At the end of this session you should be able to:
▪ Understand the concept of correlation
▪ Define an efficient stock and the efficient frontier
▪ Identify the market portfolio and the capital market line
▪ Explain the principles underlying the CAPM
▪ Understand the importance of beta
▪ Discuss applications and limitations of the CAPM
6-2
,Portfolio Theory
❑Recall a portfolio is just a combination of stocks
▪ Even with only two stocks we could create lots of different
portfolios
• Different percentage of each stock
▪ With three stocks we could create many more possible portfolios
▪ Imagine the number of possible portfolios when you have
thousands and thousands of possible stocks (and other assets!) to
choose from
6-3
, Portfolio theory
Expected
Return
Portfolio Q
x x x
x x
x x x
x
x x
x
x x All Possible
portfolios
0%
Risk as measured by standard deviation 6-4
6-1
,Learning Objectives
At the end of this session you should be able to:
▪ Understand the concept of correlation
▪ Define an efficient stock and the efficient frontier
▪ Identify the market portfolio and the capital market line
▪ Explain the principles underlying the CAPM
▪ Understand the importance of beta
▪ Discuss applications and limitations of the CAPM
6-2
,Portfolio Theory
❑Recall a portfolio is just a combination of stocks
▪ Even with only two stocks we could create lots of different
portfolios
• Different percentage of each stock
▪ With three stocks we could create many more possible portfolios
▪ Imagine the number of possible portfolios when you have
thousands and thousands of possible stocks (and other assets!) to
choose from
6-3
, Portfolio theory
Expected
Return
Portfolio Q
x x x
x x
x x x
x
x x
x
x x All Possible
portfolios
0%
Risk as measured by standard deviation 6-4
