| p>In 1990 Harry Markowitz, Merton Miller, and William | | | | stock market buying a mutual fund that is indexed to |
| Sharpe shared the first Nobel Prize in the very young | | | | the stock market such as the Vanguard 500 fund |
| area of financial economics. The Nobel committee | | | | (symbol VFINX). For this reason the amount of profit |
| recognized Harry Markowitz for developing portofolio | | | | you receive on a specific stock that is as much as |
| theory, Miller for the theory of corporate finance, | | | | the stock market indexes is said to not be priced |
| and Sharpe for the Capital Asset (stock market) | | | | into the stock in terms of the risk you are taking. |
| Pricing Model also known as CAPM. | | | | The amount you make or lose on a given stock as |
| CAPM was the crowning acheivment of theoretical | | | | compared to the stock market averages is |
| economists bent on proving that markets are | | | | considered to be priced by investors to compensate |
| efficient and work together mathematically with the | | | | for the additional risk you take in buying stock in a |
| precision and elegance of a Rolex watch. In the | | | | single company instead of a fund indexed to the |
| 1980s, researching financial economists began to | | | | stock market. The profit or loss that you receive as |
| notice a slew of empirical results that are not | | | | compared to the stock market is called systematic |
| consistent with the view that stock market returns | | | | risk. The capital asset pricing model measures |
| were determined in accordance with CAPM and stock | | | | systematic risk with a regression coefficient called |
| market efficiency. | | | | beta. When I talk about beta now you know what it |
| It is useful for you to understand what CAPM is | | | | is; it is nothing more than a measure of additional |
| because you will read or hear about it as you | | | | potential return an investor should receive for |
| progress as a stock market investor. CAPM is a | | | | purchasing a single stock based on how risky that |
| regression model designed to separate out the | | | | stock is. I want to emphasize that CAPM is based on |
| general stock market price changes from price | | | | the notion that the stock market efficiently |
| changes specific to a given stock. The general stock | | | | translates all information known about the stock |
| market price change is called unsystematic risk. An | | | | market into stock prices for stock investing |
| investor can get the same return as the general | | | | purposes. |