- The chapter discusses portfolio theory and models for determining asset prices like the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT). - Portfolio risk depends on the correlation and covariance of returns between assets. Diversification reduces unsystematic risk but not systematic market risk. - CAPM suggests investors should hold a combination of the risk-free asset and the market portfolio. It provides a framework to determine required rates of return based on an asset's systematic risk or beta. - APT assumes asset returns have predictable and unpredictable components related to macroeconomic factors. It provides an alternative model to CAPM for determining expected returns.

1. Chapter - 5 Risk and Return: Portfolio Theory and Assets Pricing Models

8. Portfolio Return and Risk for Different Correlation Coefficients

9. Investment Opportunity Sets (2 Assets) given Different Correlations Cor = - 1.0 Cor = - 0.25 Cor = + 1.0 Cor = + 0.50 Cor = - 1.0 L R

14. A Risk-Free Asset and A Risky Asset: Example R f , risk-free rate