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  2. Apologies, but I cannot get my head around this – how come adding a more riskier investment with positive correlation brings down the total risk? Could you may be try to explain in more detail?

    • It is a fundamental part of CAPM that even though virtually all shares are positively correlated, it is possible to reduce risk by creating a portfolio (it is the unsystematic risk that is removed) but that it is not possible to eliminate risk (the systematic risk remains and it is that that is measured by the beta). I go on to explain this in the later lectures.
      The calculation example is just to show how it can happen, but as I explain in the notes you cannot be asked calculations on this in the exam.

    • Good afternoon prof,

      I have finally watched the videos on Portfolio Theory. I find it very interesting and very useful beyond writing to pass P4. I do not think the decision to remove it from the P4 syllabus is a good one. For me, this is the foundation to understanding the CAPM model.

      I have one question though. As an investor and for practical purposes, how do I go about obtaining data to measure the riskiness of shares and their coefficient of correlation?

    • If you read the Introduction paragraph to the chapter in the lecture notes, you will see that you can no longer be asked for calculations on portfolio theory.

      However, as again I have written in the paragraph, you are expected to understand the idea of portfolio theory and for that reason I have left the calculation examples there because it helps make sense of what portfolio theory is.

      So no – you do not have to learn or use that formula.

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