Chapter 11
Optimal Portfolio Choice and the Capital Asset Pricing Model
I. Chapter Outline
The following chapter outline is correlated to the PowerPoint Lecture Slides. The PowerPoint slides
are referenced in bold. Alternative Examples to selected textbook examples are also available in the
PowerPoint Lecture Slides and are also referenced in bold.
11.1 The Expected Return of a Portfolio (Slides 11-12, 19)
• Example 11.1 Calculating Portfolio Returns (Slides 13–14)
11.2 The Volatility of a Two-Stock Portfolio (Slide 24)
• Combining Risks (Slides 24–27)
• Table 11.1 Returns for Three Stocks, and Portfolios of Pairs of Stocks
• Determining Covariance and Correlation (Slides 28–30)
– Covariance (Slide 29)
– Correlation (Slide 30)
• Figure 11.1 Correlation (Slide 31)
• Example 11.3 The Covariance and Correlation of a Stock with Itself (Slides 32–33)
• Common Mistake: Computing the Variance, Covariance, and Correlation in Excel
• Table 11.2 Computing the Covariance and Correlation between Pairs of Stocks (Slide 34)
• Table 11.3 Historical Annual Volatilities and Correlations for Selected Stocks (based on
monthly returns, 1996–2014) (Slide 35)
• Example 11.4 Computing the Covariance and Correlation (Slides 36–37)
• Example 11.5 Computing the Covariance from the Correlation (Slides 38–39)
• PowerPoint Alternative Example 11.5 (Slides 40–41)
11.3 The Volatility of a Large Portfolio (Slide 47)
• Large Portfolio Variance
• Diversification with an Equally Weighted Portfolio (Slide 48)
• Figure 11.2 Volatility of an Equally Weighted Portfolio Versus the Number of Stocks
(Slide 49)
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11.4 Risk Versus Return: Choosing an Efficient Portfolio (Slide 55)
56)
• Figure 11.3 Volatility Versus Expected Return for Portfolios of Intel and Coca-Cola
Stock (Slide 57)
– Identifying Inefficient Portfolios
– Identifying Efficient Portfolios
• Example 11.9 Improving Returns with an Efficient Portfolio (Slides 59–60)
• PowerPoint Alternative Example 11.9 (Slides 61–62)
• The Effect of Correlation (Slide 63)
• Example 11.10 Expected Return and Volatility with a Short Sale (Slides 66–67)
• Figure 11.5 Portfolios of Intel and Coca-Cola Allowing for Short Sales (Slide 68)
• Efficient Portfolios with Many Stocks (Slide 69, 72)
• Figure 11.6 Expected Return and Volatility for Selected Portfolios of Intel, Coca-Cola,
and Bore Industries Stocks (Slide 70)
• Figure 11.8 Efficient Frontier with Three Stocks Versus Ten Stocks (Slide 73)
11.5 Risk-Free Saving and Borrowing (Slide 74)
• Investing in Risk-Free Securities (Slides 75–76)
• Figure 11.9 The Risk-Return Combinations from Combining a Risk-Free Investment and
a Risky Portfolio (Slide 77)
• Borrowing and Buying Stocks on Margin (Slide 78)
• Example 11.11 Margin Investing (Slides 79–80)
• Identifying the Tangent Portfolio (Slides 81–85)
11.6 The Efficient Portfolio and Required Returns (Slides 88)
• Portfolio Improvement: Beta and the Required Return (Slides 88–92)
• Example 11.13 The Required Return of a New Investment (Slides 93–94)
• PowerPoint Alternative Example 11.13 (Slides 95–96)
• Expected Returns and the Efficient Portfolio (Slide 97)
11.7 The Capital Asset Pricing Model (Slide 101)
• The CAPM Assumptions (Slides 102–104)
• Supply, Demand, and the Efficiency of the Market Portfolio (Slide 105)
Berk/DeMarzo • Corporate Finance, Fourth Edition, Global Edition 47
©2017 Pearson Education, Ltd.
• Example 11.15 Portfolio Weights and the Market Portfolio (Slides 106–107)
• Optimal Investing: The Capital Market Line (Slides 108–109)
• Figure 11.11 The Capital Market Line (Slide 110)
11.8 Determining the Risk Premium (Slide 111)
• Market Risk and Beta (Slide 111)
• Example 11.16 Computing the Expected Return for a Stock (Slides 112–113)
• PowerPoint Alternative Example 11.16 (Slides 114–115)
• Example 11.17 A Negative-Beta Stock (Slides 116–117)
• PowerPoint Alternative Example 11.17 (Slides 118–119)
• The Security Market Line (Slides 120-123)
• Figure 11.12 The Capital Market Line and the Security Market Line (Slides 121-123)
• Beta of a Portfolio (Slide 124)
• Example 11.18 The Expected Return of a Portfolio (Slides 125–126)
• PowerPoint Alternative Example 11.8 (Slides 127–128)
• Summary of the Capital Asset Pricing Model (Slide 129)
Chapter 11 Appendix: The CAPM with Differing Interest Rates (Slide 134)
II. Learning Objectives
11-1 Given a portfolio of stocks, including the holdings in each stock, and the expected return in
each stock, compute the following:
11-3 Describe the contribution of each security to the portfolio.
11-5 Explain how an individual investor will choose from the set of efficient portfolios.
11-7 Explain the effect of combining a risk-free asset with a portfolio of risky assets, and compute
on a straight line.