Topic: CAPM

Threaded Discussion
Now that you have read about the CAPM, would you ever use it to make personal investment decisions? No, I am very conservative.
Consider the following: What is the main message of the CAPM? It evolves from the notion that investors in general are not stupid: They diversify their investment funds into a well-diversified portfolio. Therefore, if all are wise enough, it follows that the Market’ will not compensate people for not being smart enough to diversify. More specifically, the main message of the CAPM is that the rate of return one should expect to earn on a particular investment is only related to the systematic risk of the security not to its total risk. When you purchase a stock (because you like it or because you got a tip’), you will be exposed to the total risk of this stock, but the market theory implies that you will only be compensated for a small proportion of that risk. Hence, if you do like risk you should invest in a well diversifies risky portfolio with many securities having a high beta, rather in an individual stock.
Now go back to the initial question and present your thoughts€¦