Chapter 6 - Portfolio risk and return (Part II). The topics discussed in this chapter are: Portfolio risk and return, optimal risky portfolio and the capital market line (CML), return-generating models and the market model, systematic and non-systematic risk, capital asset pricing model (CAPM) and the security market line (SML), performance measures, arbitrage pricing theory (APT) and factor models. | Chapter 6 Portfolio Risk and Return: Part II Presenter Venue Date The chapter is organized as follows: In Section 2, the consequences of combining a risk-free asset with the market portfolio are discussed and an interpretation of the capital market line is provided. Section 3 decomposes total risk into systematic and nonsystematic risk and discusses the characteristics of and differences between the two kinds of risk. Return-generating models are introduced, including the single-index model, and the calculation of beta is illustrated by using formulas and graphically by using the security characteristic line. In Section 4, the capital asset pricing model (CAPM) and the security market line (SML) are introduced. Applications of the CAPM and the SML are made throughout the reading, including the use of expected return in making capital budgeting decisions, the evaluation of portfolios using the CAPM’s risk-adjusted return as the benchmark, security selection, and the determination of | Chapter 6 Portfolio Risk and Return: Part II Presenter Venue Date The chapter is organized as follows: In Section 2, the consequences of combining a risk-free asset with the market portfolio are discussed and an interpretation of the capital market line is provided. Section 3 decomposes total risk into systematic and nonsystematic risk and discusses the characteristics of and differences between the two kinds of risk. Return-generating models are introduced, including the single-index model, and the calculation of beta is illustrated by using formulas and graphically by using the security characteristic line. In Section 4, the capital asset pricing model (CAPM) and the security market line (SML) are introduced. Applications of the CAPM and the SML are made throughout the reading, including the use of expected return in making capital budgeting decisions, the evaluation of portfolios using the CAPM’s risk-adjusted return as the benchmark, security selection, and the determination of whether adding a new security to the current portfolio is appropriate. The focus on the CAPM does not suggest that the CAPM is the only viable asset pricing model. Although the CAPM is an excellent starting point, more advanced readings expand on these discussions and extend the analysis to other models that account for multiple explanatory factors. A preview of a number of these models is given in Section 5. Finally, Section 6 concludes the reading and provides a summary. DISCLAIMER: Candidates should understand that this presentation is NOT a substitute for a thorough understanding of the CFA Program curriculum. This presentation is also NOT necessarily a reflection of all the knowledge and skills needed for candidates to successfully complete questions regarding this topic area on the CFA exam. 1 Formulas for Portfolio Risk and Return LOS: Discuss the implications of combining a risk-free asset with a portfolio of risky assets. Page 245 The risk–return characteristics of a portfolio
