Chapter 7
Risk-Free and Risky Asset
Allocation and the CAPM
Adair | Nofsinger, Foundations of Investments, 1 st Edition. © 2024 Cengage. All Rights Reserved. May not be scanne
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, Chapter Objectives, 1 of 2
By the end of this chapter, you should be able to:
• LO 7-1 Recognize how the addition of a risk-free asset to the effic
frontier creates the capital allocation line.
• LO 7-2 Assess the new optimal portfolio on the capital allocation
• LO 7-3 Understand the construction and role of the capital marke
and the market portfolio.
• LO 7-4 Use the capital asset pricing model to compute expected
return.
• LO 7-5 Recognize the security market line and its uses.
Adair | Nofsinger, Foundations of Investments, 1 st Edition. © 2024 Cengage. All Rights Reserved. May not be scanne
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, Chapter Objectives, 2 of 2
• LO 7-6 Know the basic assumptions underlying the CAPM.
• LO 7-7 Find company betas.
• LO 7-8 Estimate company and portfolio betas.
• LO 7-9 Understand the problems with estimating a beta.
• LO 7-10 Compute a portfolio beta from individual security betas.
Adair | Nofsinger, Foundations of Investments, 1 st Edition. © 2024 Cengage. All Rights Reserved. May not be scanne
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, Capital Allocation Line, 1 of 3
• Risk-Free Asset
− Cash flow payoff is known and will occur
− Usually reflects the three-month Treasury bill rate
• Efficient Frontier
− From modern portfolio theory
− Reflects the required return for each level of portfolio risk
Adair | Nofsinger, Foundations of Investments, 1 st Edition. © 2024 Cengage. All Rights Reserved. May not be scanne
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Risk-Free and Risky Asset
Allocation and the CAPM
Adair | Nofsinger, Foundations of Investments, 1 st Edition. © 2024 Cengage. All Rights Reserved. May not be scanne
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, Chapter Objectives, 1 of 2
By the end of this chapter, you should be able to:
• LO 7-1 Recognize how the addition of a risk-free asset to the effic
frontier creates the capital allocation line.
• LO 7-2 Assess the new optimal portfolio on the capital allocation
• LO 7-3 Understand the construction and role of the capital marke
and the market portfolio.
• LO 7-4 Use the capital asset pricing model to compute expected
return.
• LO 7-5 Recognize the security market line and its uses.
Adair | Nofsinger, Foundations of Investments, 1 st Edition. © 2024 Cengage. All Rights Reserved. May not be scanne
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, Chapter Objectives, 2 of 2
• LO 7-6 Know the basic assumptions underlying the CAPM.
• LO 7-7 Find company betas.
• LO 7-8 Estimate company and portfolio betas.
• LO 7-9 Understand the problems with estimating a beta.
• LO 7-10 Compute a portfolio beta from individual security betas.
Adair | Nofsinger, Foundations of Investments, 1 st Edition. © 2024 Cengage. All Rights Reserved. May not be scanne
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, Capital Allocation Line, 1 of 3
• Risk-Free Asset
− Cash flow payoff is known and will occur
− Usually reflects the three-month Treasury bill rate
• Efficient Frontier
− From modern portfolio theory
− Reflects the required return for each level of portfolio risk
Adair | Nofsinger, Foundations of Investments, 1 st Edition. © 2024 Cengage. All Rights Reserved. May not be scanne
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
