Capital Market Theory: Rapid Fire

What this video covers

• How modern portfolio theory (MPT) builds the efficient frontier by combining assets with correlation below +1.0, and why individual securities plot inside it
• The capital asset pricing model (CAPM) formula: E(R) = Rf + beta x (Rm - Rf), and why it compensates only for systematic risk (beta), not total risk
• How to calculate alpha as actual return minus CAPM-expected return, not portfolio return minus market return
• The critical distinction between the capital market line (CML), which uses standard deviation for efficient portfolios only, and the security market line (SML), which uses beta for any security
• Why a stock plotting above the SML is undervalued (positive alpha, buy), not overvalued
• The three forms of the efficient market hypothesis (EMH): weak, semi-strong, and strong, including why insider trading regulations are evidence against the strong form
• When R-squared below 0.70 makes beta unreliable and forces you back to standard deviation