Important Points for IC 99 - Asset Management Exam
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The CAPM can be applied by portfolio manager or investor to decide as to whether buy, sell or hold stocks.
It can be judged from the point of Current Market Price as shown below : i) If Actual Market Price = CAPM since, stock is undervalued, ii) If Actual Market Price = CAPM since, stock is overvalued, iii) If Actual Market Price = CAPM since, stock is correctly valued.
MPT of Harry Markowitz deals with unsystematic risks which can be reduced with diversification while CAPM of Treynor deals with systematic risks which cannot be reduced by simple process of diversification.
It is a situation when the stock gives less return than what it should give.
Variance is the mean of the squares of the deviations of returns with reference of their average value, which have been discussed in detail in earlier charter.
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