FRM 5. Modern Portfolio Theory and the Capital Asset Pricing Model

Learning Objectives

1) Explain modern portfolio theory and interpret the Markowitz efficient frontier.

2) Understand the derivation and components of the CAPM.

3) Describe the assumptions underlying the CAPM.

4) Interpret and compare the capital market line and the security market line.

5) Apply the CAPM in calculating the expected return on an asset.

6) Interpret beta and calculate the beta of a single asset or portfolio.

7) Calculate, compare and interpret the following performance measures: the Sharpe performance index, the Treynor performance index, the Jensen performance index, the tracking error, information ratio and Sortino ratio.