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Hie tutor,
I have tried to pinpoint the differences between capm and portfolio theory.It seems i am hitting rock bottom.
Thank you
Have you watched my free lectures on both of these?
Portfolio theory states that individual investors can reduce their risk by investing in a portfolio of shares. Investing all your money in one share means you are subject to all the risk of that share, but investing in several shares means that although each share is risky the risk cancels out. The risk being cancelled is the unsystematic risk, but however many shares you invest in you are still subject to the systematic risk which is the risk of the overall stock exchange moving up and down.
CAPM assumes that investors are well-diversified and that therefore it is only the systematic risk that determines the return demanded by investors.
Obviously portfolio theory calculations are not examinable – only CAPM calculations.
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