Capital Market Theory and Portfolio Risk Measures

Abstract

This chapter is a continuation and extension of modern portfolio theory presented in Chapter 3, with an emphasis on risk measures and risk management of a portfolio. It introduces the capital asset pricing model (CAPM), linear factor models, and several approaches to portfolio risk measures such as value-at-risk, conditional value-at-risk and the concept of coherent risk measures, as well as a variety of portfolio evaluation techniques such as the alpha and beta, the Sharpe ratio, the Sortino ratio and maximum drawdown. The introduction to factor models is brief and from intuitive perspective.