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# LectureX - Lecture X Market Evaluation of Investment Risk...

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Lecture X: Market Evaluation of Investment Risk Part I: Capital Asset Pricing Model I. General Portfolio Theory A. Among the stated assumption in deterministic investment analysis was the independence of outcomes across projects. In the deterministic case this meant that the returns on a particular project did not depend on other projects being accepted. B. Another type of dependence is a dependence or correlation in risk. If the error or risk associated with one asset is correlated with the risk of another asset, then the total risk of holding both assets is different than the sum of the riskiness of the two assets. 1. For example, holding stock in a company that produces gas guzzling cars and stock in an oil company will produce a different level of risk than holding stock in the car company and stock in a computer company even if the stock in the oil company and the computer stock have the same individual riskiness. 2. Mathematics: Assume ( 29 ( 29 ( 29 ( 29 2 2 2 2 , 0, , 0, A A A A A A A B B B B B B B r N r N r N r N m s e m s m s e m s = - = - : : : : a. Forming a portfolio with α percent of asset A and (1- α ) of asset B yields an expected rate of return and variance of

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LectureX - Lecture X Market Evaluation of Investment Risk...

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