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Portfolio Market Risk
Portfolio Market Risk is the aggregate of weighted average
market risk of individual security in the portfolio.
A high beta value portfolio is considered high risky portfolio
since the return of this portfolio is highly integrated with the
return of market. Beta which is measurement of market risk
of portfolio can be calculated by regressing the return of a
security with the return of some index. Symbolically it can be
written as
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Capital Market Line
A capital market line indicates the trade off between
investors’ portfolio risk and portfolio return. Investors
would be ready to take extra risk only when they will
expect extra return.
Security Market Line
A Security Market Line exhibits the various combination of
portfolio market risk and portfolio return. In an efficient
capital market, investors want increasing return for
increasing risk. They will be ready to bear extra market risk
only when they will extra risk premium. SML facilitates the
investors to determine the required rate of return for given
level of market risk.
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