I will briefly introduce these models after we have finished with the CAPM. 2. The Planning Problem The Capital Asset Pricing Model is an equilibrium model. The prices that exist in the economy are a result of all consumers maximizing utility and markets clearing, i.e. prices are set such that supply equals demand...
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prices are set such that supply equals demand. Our goal is to create (model) a simple economy with these ingredients and see if the pricing function has power to predict actual prices in the economy. A simple economy involves simple assumptions. After we derive the CAPM, you will note that many assumptions have been made that are not very realistic...
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Modern Portfolio Theory Out of a universe of risky assets, an efficient frontier of optimal portfolios can be constructed. Each portfolio on the efficient frontier offers the maximum possible expected return for a given level of risk...	19 / 5041
Risk Management Simulation It is just like going to a casino and gambling but the odds might be a little better in the stock market than in a casino. An investor that is relatively risk adverse means “the investor dislikes risk and will stay away from adding high-risk stocks or investments to their portfolio and in turn will often lose out on higher rates of return,” These investors tend to stay with investments with lower return rates such as bonds (investopedia, 2--8, risk adverse)...	3 / 666
Investment techniques to reduce portfolio risks An alternative to the CAPM, APT has the different assumptions and explanation of risk factors associated with the risk of an asset. Under this model, a relationship between the return of portfolio and the returns of a single asset through a linear combination of variables would be predicted...	2 / 325
Risk Analysis Theoratically, if two such stocks are combined the returns would be relatively riskless. It is rather difficult to find stocks whose returns are negatively correlated- it takes a consideration of sectors and also historical analysis...	3 / 749