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What is the security market line? How is the portfolio beta calculated?

  1. What is the security market line?
  2. How is the portfolio beta calculated?
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Answer #1

Security market line takes expected return calculated through CAPM on y axis and diversifiable risk in x axis.Here expected return is function of beta.It helps in identifying whether a security is overvalued or undervalued.

to calculate Portfolio beta individual stock's beta is obtained by taking the covariance of stock and market return divided by variance of market. The portfolio beta is weighted average beta of all the stocks in the portfolio.

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