The security Market line is the line that we get when we plot the beta of different Securities and the expected return of different Securities. The security Market line is upward-sloping. The reason is that if you have more systematic risk , which i…
Let's say we have an investor who's going to invest in a portfolio that includes two stocks, we've got stock A and stock B . This investor can invest in any different number of combinations. They could put 90% of the portfolio in stock…
There are several assumptions of the capital asset pricing model. So just a quick review remember that the CAPM formula is, the expected return of a security , otherwise known as the cost of capital . So we got the cost of capital = the r isk-fre…
In our capital asset pricing model formula, we've got the risk-free rate (Rf) , that's the rate of return you'd earn on an investment that has zero risk like a 3-month US Treasury bill or something like that. Then you add to that the …
The capital asset pricing model is often called CAPM for short. It is an investment theory that shows the relationship between the expected return of an investment and market risk . So CAPM is a formula that's used to calculate the expected ret…
The Treynor ratio is a percentage that measures the reward to risk of a portfolio and when I say risk here I'm referring only to systematic risk . So it's actually a distinction between the Treynor ratio and the Sharpe ratio . They both mea…
The Sharpe ratio measures the risk to reward of a portfolio. So the formula is we take the excess return of the portfolio which is the expected return of the portfolio (Rp) minus the risk-free rate of return (Rf) and we take that excess return and…
If you can find another portfolio that has a higher expected return but doesn’t have a higher risk or doesn’t have higher volatility that will be an inefficient portfolio. So for example, let’s say we’ve got portfolio Y and portfolio Z and they ea…
