Investment and Portfolio Analysis

Portfolio Theory - Part 3


This eCourse consists of three modules. Module 1 introduces capital asset pricing model (CAPM). CAPM is central to portfolio building. Though it has been proposed since mid-1960s, it still has empirical evidence of the validity of the model. This module describes in detail the theory of CAPM and looks at some of the empirical evidence of the validity of the model.

Module 2 examines in detail the arbitrage pricing theory (APT) model which was introduced by Stephen Ross in 1976 as a different equilibrium model that relaxes many of the assumptions of CAPM. The APT model does not depend on the need for an underlying market portfolio, instead operating on the key assumption that the returns on a security are generated by an identical process to that used by single- and multi-index models. Beginning by comparing the assumptions of the APT model with those of CAPM, this module describes how the arbitrage process works and examines the merits of APT as a capital asset pricing model.

Module 3 is a video which provides a high level overview of factor-based investing, describing how this investment approach seeks to exploit excess returns by focusing not on asset class selection but on the selection of assets with appropriate factor exposures. The video outlines the emergence and development of factor-based investing, the factors that are common to most strategies, the theories that attempt to explain why a factor-based approach works, and the issues and challenges in implementing such an approach.


On completion of this tutorial, you will be able to:
- Understand the derivation of the market portfolio
- Recognize how the security market line differs to the capital market line
- List the assumptions and some of the criticism levelled against them
- Discuss some of the empirical evidence supporting the CAPM
- Compare the assumptions of the APT model with those of CAPM
- Describe how the arbitrage process works to ensure an equilibrium along the arbitrage pricing line
- Evaluate the merits of APT as a capital asset pricing model


Module 1: Capital Asset Pricing Model (CAPM) 
Topic 1: Security Market Line
Topic 2: Assumptions & Criticisms of the CAPM
Topic 3: Empirical Evidence for the CAPM

Module 2: APT & Factor Models 
Topic 1: Arbitrage Pricing Model
Topic 2: Other Factor Models

Module 3: Factor-Based Investing - Primer


Relevant Subject
Type 1 - Dealing in securities
Type 4 - Advising on securities
Type 9 - Asset management
SFC:2.00, PWMA:2.00
Non-Member: HK$840
All Member: HK$570
Staff of Corporate Member: HK$570