Learning Outcome Statements

1. Capital Market Theory

a. describe the implications of combining a risk-free asset with a portfolio of risky assets;

b. explain the capital allocation line (CAL) and the capital market line (CML);

2. Pricing of Risk and Computation of Expected Return

c. explain systematic and nonsystematic risk, including why an investor should not expect to receive additional return for bearing nonsystematic risk;

d. explain return generating models (including the market model) and their uses;

e. calculate and interpret beta;

3. The Capital Asset Pricing Model

f. explain the capital asset pricing model (CAPM), including its assumptions, and the security market line (SML);

g. calculate and interpret the expected return of an asset using the CAPM;

4. Applications of the CAPM

h. describe and demonstrate applications of the CAPM and the SML.