Unformatted text preview: tical instability,
such risk cannot be eliminated or reduced through
diversiﬁcation and must be accepted by the investor.
nonsystematic, diversiﬁable, unique risk: examples: business risk and ﬁnancial risk.
Thus, the aim is to invest into various assets so that
your assets are not all affected the same way by
Diversiﬁed Portfolio ⇔ Systematic Risk see Figure 11.7
K.S. Tan/Actsc 372 F11 Modern Portfolio Theory & CAPM – p. 44 Capital Asset Pricing Model (CAPM)
due to William Sharpe (1964), John Lintner (1965) and
Jan Mossin (1966)
builds on Markowitz portfolio theory
it predicts an equilibrium relationship between risk and
expected return on risky assets, assuming that individuals
are basically alike, except for wealth and risk aversion
provides the “correct" measure of risk for any asset
only compensates investors for bearing systematic risk
addresses the ONE FUND that all investors will hold! K.S. Tan/Actsc 372 F11 Modern Portfolio Theory & CAPM – p. 45 CAPM - Assumptions
Assumptions (in addition to Markowitz’s):
There are many investor...
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This note was uploaded on 01/04/2012 for the course ACTSC 372 taught by Professor Maryhardy during the Fall '09 term at Waterloo.
- Fall '09