This is a very important chapter as it deals with portfolio theory and the capital asset pricing model. This is a difficult chapter and students find it hard to understand the concepts fully. The concepts of efficient portfolios and the risk-free asset are explained clearly. It concentrates on the Markowitz portfolio selection model and the capital asset pricing model (CAPM), and builds on the previous chapter. Other theories like arbitrage pricing theory (APT) and the Three-Factor model are discussed.
