Portfolio Theories

Portfolio Theories

Portfolio theories Modern Portfolio Theory (MPT) baskets of assets optimizing risk and return (Markowitz) Capital Asset Pricing Model (CAPM) model for calculating required return (return = risk-free + beta × premium) Efficient Market Hypothesis (EMH) hypothesis that the market is efficient, prices reflect all information Efficient frontier curve of optimal portfolios (maximum return at each level of risk) Capital Market Line line of all possible returns at a given risk (taking borrowing into account) Security Market Line line of fair value (if price is higher = buy, lower = sell) Arbitrage Pricing Theory (APT) expansion of CAPM, many factors instead of one beta Behavioral finance finance taking into account investor psychology (they are not always rational) Prospect theory people fear losses more than they rejoice at gains Market anomalies inconsistencies of EMH (January effect, weekend effect, etc.)