U20LO8

The CAPM determines an asset's expected rate of return

solely on the basis of the asset's systematic (non-diversifiable) risk.

MPT holds that

specific risk can be diversified away by building portfolios of assets whose returns are not correlated.

Decreased correlation leads to

decreased risk.

CAPM is a securities market investment theory allowing the investor to

determine an asset's expected rate of return, a form of risk-adjusted return encapsulating how much risk the investor should assume to obtain a particular return from an investment.

Modern portfolio theory is

an approach that attempts to quantify and control portfolio risk.

Modern portfolio theory differs from a traditional securities analysis in that it

emphasizes determining the relationship between risk and reward in the total portfolio rather than analyzing specific securities.

The goal is to design the optimal portfolio. An optimal portfolio is one that

makes the best trade-off between risk and reward for a given investor's investment profile.

Alpha and beta are not used in the CML equation while

standard deviation is.

Instead of emphasizing particular stocks, modern portfolio theory (MPT) focuses on

the relationships among all the investments in a portfolio.