Risk-return tradeoff and diversification
The book builds portfolio construction on the principle that diversification cuts risk without proportionally cutting return. Investors are compensated only for non-diversifiable risk.
Essentials of Investments
3 ideas
CAPM and the efficient frontier
Expected return relates to systematic risk (beta) via the Capital Asset Pricing Model, and optimal portfolios lie on the efficient frontier. Pricing rests on market equilibrium.
Market efficiency frames security analysis
The efficient market hypothesis describes how fast prices reflect information, bounding the payoff to active management. Valuation methods are taught against this backdrop.