
Capital asset pricing model (CAPM)
The capital asset pricing model (or the CAPM) is probably one of the most commonly taught topics in finance. This is not because it is a perfect model. In fact, it is far from it. However, the CAPM is built upon some of the most fundamental concepts in finance. Furthermore, CAPM is widely used in […]

Systematic risk and unsystematic risk
When we talk about the risk of investing in stocks, corporate bonds, etc., we can distinguish between two main sources of risk: Systematic risk and unsystematic risk. The former relates to sources of risk that affect the entire market whereas the latter is risk specific to individual securities. Learning objectives Understand the distinction between systematic […]

What is the market portfolio?
The market portfolio is the market valueweighted portfolio of all risky assets in an economy. In this post, we show how the market portfolio is equivalent to the optimal risky portfolio when all investors behave according to the modern portfolio theory. Learning objectives Understand the link between the optimal risky portfolio and the market portfolio. […]

What is the optimal risky portfolio?
In the previous post, we explained that when there is no riskfree asset in an economy, investors should invest in one of the efficient portfolios that lie on the efficient frontier based on their risk tolerance. We added that, if a riskfree asset exists, then there is a unique efficient portfolio that all investors should […]

Efficient frontier – What is it?
The efficient frontier is the collection of all efficient portfolios in a market. But, what does that actually mean? How can investors distinguish between efficient portfolios and inefficient ones? Learning objectives Understand the concept of an efficient portfolio. Identify the main features of the efficient frontier. The meanvariance framework Not all portfolios of assets are […]

The risk of a portfolio – Calculator and formula
We often say that risk and return are two sides of the same coin. You can’t discuss one without the other. In the previous post, we showed you how to calculate the return on a portfolio of assets. In this post, we explain the formula for portfolio risk. We also offer an easytouse portfolio risk […]

Portfolio return calculator and formula
In this post, we explain the formula behind the calculation of portfolio returns. Furthermore, we provide a free online portfolio return calculator, which works as a portfolio expected return calculator as well as a portfolio realized return calculator. Finally, with this port, we make an introduction to the modern portfolio theory as well. So far […]

Risk premium – What does it mean?
Different stocks offer different levels of expected return. What causes stock A’s expected return to be higher than stock B’s expected return? How does the expected return of a risky asset relate to the riskfree rate of return? In this post, we answer both questions by introducing the concept of risk premium. Learning objectives Define […]

The risk appetite of investors
How do investors differ in terms of their risk preferences? Are we all risk lovers? Or, do we prefer to avoid or minimize risk if we can? Perhaps our risk appetite is more dynamic. For instance, it may depend on the situation and our circumstances. In this post, we will elaborate on how financial economists […]

Expected return calculator and formula
When evaluating an asset’s past performance, we can make use of the historical (or realized) average return. In that sense, the historical average return is a backwardlooking measure. But, in order to forecast an asset’s future performance, we need a forwardlooking measure. This measure is called the expected return. In this post, we explain the […]