Exam Weight: ~3 questions (2% of exam)
Capital market theory provides the theoretical foundation for understanding how markets work and how investors should construct portfolios. This unit covers Modern Portfolio Theory, the Capital Asset Pricing Model, and the Efficient Market Hypothesis, which together form the basis for all portfolio management decisions.
What You'll Learn
- How Modern Portfolio Theory uses correlation and diversification to construct optimal portfolios on the efficient frontier
- How the Capital Asset Pricing Model determines expected returns based on systematic risk, and how to use the Security Market Line and Capital Market Line
- The three forms of the Efficient Market Hypothesis and their implications for active vs. passive management