Patrick Sim*
The essay will examine the concepts of assets pricing, portfolio returns and risk. It will address two asset portfolio that will demonstrate that risk can be reduced to zero with perfect negative relation. It will also explain why this is not necessarily convincing explanation for effects. It will also discuss the reason why there is little or no portfolio effect with positive relations. We will also see how this correlation of capital assets are applied to the performance ratios. In finance, the Capital Asset Pricing Model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.
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