b. If you were restricted to investing in publicly traded common stocks, yet you
wanted to minimize the riskiness of your portfolio as measured by its beta, then
according to the CAPM theory you should invest an equal amount of money in each
stock in the market. That is, if there were 10,000 traded stocks in the world,
the least risky possible portfolio would include some shares of each
one.
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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