Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM) (FRM P1 2025 – B1 – Ch5)

Video Description

Master Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM) for FRM Part 1 – Book 1: Foundations of Risk Management. In this lesson, Prof. James Forjan (PhD, CFA) explains the intuition behind diversification, beta, systematic vs unsystematic risk, and how CAPM determines expected return. Perfect for FRM candidates who want clarity without memorizing formulas. What you’ll learn (chapter coverage): • Assumptions underlying CAPM • Deriving the Security Market Line (SML) • Interpreting Beta (systematic risk) • Capital Market Line (CML) • Treynor Ratio vs Sharpe Ratio vs Jensen’s Alpha • Tracking Error, Information Ratio, Sortino Ratio • How to evaluate fund performance using risk-adjusted metrics By the end of this lesson, you will be able to: • Calculate expected return using CAPM • Interpret beta and diversification benefits • Compare portfolios using Treynor, Sharpe, Jensen’s Alpha • Understand when unsystematic risk disappears • Evaluate portfolio managers on risk-adjusted returns AnalystPrep is a GARP-approved FRM Exam Prep Provider. Get the full FRM study package — video lessons, question bank, summaries, and mock exams. For FRM (Part I & Part II) video lessons, study notes, question banks, mock exams, and formula sheets covering all chapters of the FRM syllabus, click on the following link: https://analystprep.com/shop/unlimited-package-for-frm-part-i-part-ii/ *AnalystPrep is a GARP-Approved Exam Preparation Provider for FRM Exams* After completing this reading you should be able to: - Explain modern portfolio theory and interpret the Markowitz efficient frontier. - Understand the derivation and components of the CAPM. - Describe the assumptions underlying the CAPM. - Interpret the capital market line. - Apply the CAPM in calculating the expected return on an asset. - Interpret beta and calculate the beta of a single asset or portfolio. - Calculate, compare and interpret the following performance measures: the Sharpe performance index, the Treynor performance index, the Jensen performance index, the tracking error, information ratio and Sortino ratio. 0:00 Introduction 0:15 Learning Objectives 0:55 Assumptions Underlying the CAPM 9:21 Interpreting Beta 16:53 Example on Beta 19:57 Derivation of CAPM 21:39 The Capital Market Line 28:53 The Treynor Measure: Analogy 32:41 The Sharpe Measure 35:08 The Jensen Measure 44:54 The Tracking-Error: Example 46:09 The Information Ratio 48:19 The Sortino Ratio #FRM #RiskManagement #CAPM #ModernPortfolioTheory #FinanceEducation #QuantitativeAnalysis #AnalystPrep #InvestingBasics #PortfolioManagement #GARP