Portfolio Theory10. WE HAD TO HAVE BOTH A WARM AND COLD WEATHER MENU. 13. RISK IS REDUCED BY INVESTING IN MULTIPLE STOCKS INSTEAD OF JUST ONE STOCK. 14. IT LAID THE GROUND WORK TO CALCULATE EFFICIENT PORTFOLIOS USING LINEAR PROGRAMMING METHODS: 17. IF TWO EVENTS (a & b) ARE INDEPENDENT THAN THE TOTAL VARIANCE IS 19. IF TWO EVENTS (a & b) ARE NOT INDEPENDENT THAN THE TOTAL VARIANCE IS 23. THEY RESPOND IN A SENSE TO SOME UNDERLYING MARKET WEATHER PATTERNS (NOT JUST THE ECONOMY). 24. A PORTFOLIO’S TOTAL VARIANCE INCLUDES COVARIANCE TERMS (MARKOWITZ CALLED THEM SEMI VARIANCE AT THE TIME). 25. ITS THE EXISTANCE OF COVARIANCE THAT ALLOWS THE DIVERSIFICATION OF PORTOLIOS DUR TO REDUCED TOTAL RISK 26. THIS DEPENDENCE AMONG STOCKS THAT MOVE TOGETHER IS A SEPARATE PHENOMENON FROM THAT IS DESCRIBED BY THE EFFICIENT MARKET HYPOTHESIS: 29. THE FIRST CONTRIBUTION WAS TO SIMPLIFY THE COMPUTATION OF AN EFFICIENT PORTFOLIO BASED ON THE TWO MATHEMATICAL PROPERTIES: 30. AN EFFICIENT PORTFOLIO CAN BE COMPUTED AS THE MATRIX PRODUCT OF THE INVERSE OF THE STOCKS' COVARIANCE MATRIX AND THE VECTOR OF THE MEAN STOCK RETURNS MINUS A CONSTANT. 42. IT IS THE VOLITILITY OF THE STOCK TO MOVE WITH THE MARKET AS A WHOLE. 45. IF WE RUN A REGRESSION OF A STOCK'S PRICE HISTORY AGAINST THE PRICE HISTORY OF THE S&P 500 WE GET: 48. THE SUM OF THE INDIVIDUAL STOCK BETA'S ARE THE SAME OF THE PORTFOLIO'S BETA. 50. THE RATIONAL INVESTOR WILL PRICE ALL STOCKS SO THAT THEY WILL BECOME ONLY COMPONENTS OF EFFICIENT PORTFOLIO'S. 52. LETS TEST THE THEORY OF THE CAPITAL ASSET PRICING MODEL (CAPM). 57. CAPM AT THIS STAGE IS STILL JUST AN ECONOMIC EQUILIBRIUM MODEL. 58. THE SYSTEMATIC RISK OF THE MARKET WON'T GO AWAY SO BELLY UP TO THE TABLE AND PLACE YOUR BETS.