Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM) (FRM P1 2021 – B1 – Ch5)

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After completing this reading you should be able to:
- Explain modern portfolio theory and interpret the Markowitz efficient frontier.
- Understand the derivation and components of the CAPM.
- Describe the assumptions underlying the CAPM.
- Interpret the capital market line.
- Apply the CAPM in calculating the expected return on an asset.
- Interpret beta and calculate the beta of a single asset or portfolio.
- 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.

0:00 Introduction
0:15 Learning Objectives
0:55 Assumptions Underlying the CAPM
9:21 Interpreting Beta
16:53 Example on Beta
19:57 Derivation of CAPM
21:39 The Capital Market Line
28:53 The Treynor Measure: Analogy
32:41 The Sharpe Measure
35:08 The Jensen Measure
44:54 The Tracking-Error: Example
46:09 The Information Ratio
48:19 The Sortino Ratio