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Portfolio ManagementModule 2 of 3

Portfolio Risk and Return: Part II

5

Concepts

5

Formulas

1

Decisions

4

Quiz Questions

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Key Concepts

5 concepts covered in this module.

Capital Market Line (CML)

CAL using the MARKET portfolio as the optimal risky portfolio. E(R) = Rf + [(Rm-Rf)/σm]σp.

Systematic vs Unsystematic Risk

Systematic (market/non-diversifiable): β measures sensitivity. Unsystematic (company-specific): eliminated by diversification.

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Formulas

5 essential formulas for this module.

CAPM / SML

E(Ri) = Rf + βi[E(Rm) - Rf]

Where: Rf = risk-free, β = beta, E(Rm)-Rf = market risk premium

Beta

βi = Cov(Ri, Rm) / σ²m

Where: σ²m = variance of market returns

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Decision Frameworks

1 decision frameworks to guide your analysis.

Which performance measure to use?

  • Sharpe: for well-diversified portfolios (total risk matters)
  • Treynor: for portfolios that are part of a larger diversified portfolio (β matters)
  • Jensen’s Alpha: for measuring active manager skill

Mind Map

Visual overview of how concepts connect in this module.

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Capital Market Line (CML)

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Answer
CAL using the MARKET portfolio as the optimal risky portfolio. E(R) = Rf + [(Rm-Rf)/σm]σp.
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Portfolio Risk and Return: Part I

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Portfolio Management Overview and Planning