Chapter 10 - Estimating Risk and Return Be able to calculate: expected return and standard deviation (don't worry about correlation), portfolio expected return with two assets, portfolio weights, expected (required) return usinsg the Capital Asset Pricing Model (CAPM), finding unknown variable given the other three with the CAPM Know concepts: systematic vs. diversifiable risk, know other terms for systematic and diversifiable risk, diversification reduces diversifiable risk but does not eliminate systematic risk, beta is a measure of systematic risk, standard deviation is a measure of total risk, in a well-diversified portfolio diversifiable risk is almost completely eliminated (systematic risk cannot be eliminated through diversification. The CAPM is justified economically because investors can diversify so systematic risk (beta) is all that matters. The Security Market Line (SML) is the graphical representation of the CAPM. The CAPM says that expected (required) return is equal to the risk free rate plus a premium for bearing systematic risk (amount of risk, as measured by beta x reward for bearing risk, measured by the market risk Chapter 10 - Estimating Risk and Return Be able to calculate: expected return and standard deviation (don't worry about correlation), portfolio expected return with two assets, portfolio weights, expected (required) return usinsg the Capital Asset Pricing Model (CAPM), finding unknown variable given the other three with the CAPM Know concepts: systematic vs. diversifiable risk, know other terms for systematic and diversifiable risk, diversification reduces diversifiable risk but does not eliminate systematic risk, beta is a measure of systematic risk, standard deviation is a measure of total risk, in a well-diversified portfolio diversifiable risk is almost completely eliminated (systematic risk cannot be eliminated through diversification. The CAPM is justified economically because investors can diversify so systematic risk (beta) is all that matters. The Security Market Line (SML) is the graphical representation of the CAPM. The CAPM says that expected (required) return is equal to the risk free rate plus a premium for bearing systematic risk (amount of risk, as measured by beta x reward for bearing risk, measured by the market risk