Capital Market Theory: Rapid Fire

What this video covers

• Why systematic risk can never be diversified away, while unsystematic risk disappears through diversification, and why only systematic risk earns a risk premium
• How the Capital Asset Pricing Model (CAPM) uses beta to price individual assets, and the exact computation of market risk premium as market return minus the risk-free rate
• What beta readings mean (1.0, above 1.0, below 1.0, 0, negative), and why beta measures only market sensitivity rather than total volatility
• Why an asset plotting above the Security Market Line (SML) is undervalued and below is overvalued, despite intuitive traps
• How Modern Portfolio Theory (MPT) uses standard deviation to measure total risk and builds optimal portfolios on the efficient frontier through low or negative correlation
• What correlation values of +1.0 and -1.0 imply for diversification benefit, and why the efficient frontier represents the best return for a given risk level
• Each form of the Efficient Market Hypothesis (EMH): weak form killing technical analysis, semi-strong form killing both technical and fundamental, and strong form killing even insider edges