Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM) (FRM P1 2025 – B1 – Ch5)

Описание: Master Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM) for FRM Part 1 – Book 1: Foundations of Risk Management. In this lesson, Prof. James Forjan (PhD, CFA) explains the intuition behind diversification, beta, systematic vs unsystematic risk, and how CAPM determines expected return.
Perfect for FRM candidates who want clarity without memorizing formulas.

What you’ll learn (chapter coverage):
• Assumptions underlying CAPM
• Deriving the Security Market Line (SML)
• Interpreting Beta (systematic risk)
• Capital Market Line (CML)
• Treynor Ratio vs Sharpe Ratio vs Jensen’s Alpha
• Tracking Error, Information Ratio, Sortino Ratio
• How to evaluate fund performance using risk-adjusted metrics

By the end of this lesson, you will be able to:
• Calculate expected return using CAPM
• Interpret beta and diversification benefits
• Compare portfolios using Treynor, Sharpe, Jensen’s Alpha
• Understand when unsystematic risk disappears
• Evaluate portfolio managers on risk-adjusted returns

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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

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