Introduction

Welcome to Capital Market Theory: the foundational framework that explains how risk and return are related in financial markets and how rational investors should construct portfolios.

Exam Weight: Part of 30 questions

What You'll Learn

In this unit, you'll cover:

• Capital Asset Pricing Model (CAPM): The formula linking systematic risk (beta) to expected return, and how the Security Market Line identifies undervalued and overvalued assets
• Modern Portfolio Theory (MPT): Harry Markowitz's framework for building optimal portfolios through diversification and the efficient frontier
• Efficient Market Hypothesis (EMH): The theory that prices reflect available information, and what each form means for technical and fundamental analysis

Why This Matters

Capital market theory gives you the intellectual foundation for every portfolio recommendation you'll make as an investment adviser representative. The exam tests whether you understand which risk measure each model uses, how diversification actually works, and which forms of market efficiency invalidate which types of analysis. These distinctions are among the most frequently tested concepts in the Series 66.

Let's start with the Capital Asset Pricing Model.