Skip to content
Felix
  • Topics
    • My List
    • Felix Guide
    • Asset Management
    • Coding and Data Analysis
      • Data Analysis and Visualization
      • Financial Data Tools
      • Python
      • SQL
    • Credit
      • Credit Analysis
      • Restructuring
    • Financial Literacy Essentials
      • Financial Data Tools
      • Financial Math
      • Foundations of Accounting
    • Industry Specific
      • Banks
      • Chemicals
      • Consumer
      • ESG
      • Insurance
      • Oil and Gas
      • Pharmaceuticals
      • Project Finance
      • Real Estate
      • Renewable Energy
      • Technology
      • Telecoms
    • Introductory Courses
    • Investment Banking
      • Accounting
      • Financial Modeling
      • M&A and Divestitures
      • Private Debt
      • Private Equity
      • Valuation
      • Venture Capital
    • Markets
      • Economics
      • Equity Markets and Derivatives
      • Fixed Income and Derivatives
      • Introduction to Markets
      • Options and Structured Products
      • Other Capital Markets
      • Securities Services
    • Microsoft Office
      • Excel
      • PowerPoint
      • Word & Outlook
    • Professional Skills
      • Career Development
      • Expert Interviews
      • Interview Skills
    • Risk Management
    • Transaction Banking
    • Felix Live
  • Pathways
    • Investment Banking
    • Asset Management
    • Equity Research
    • Sales and Trading
    • Commercial Banking
    • Engineering
    • Operations
    • Private Equity
    • Credit Analysis
    • Restructuring
    • Venture Capital
    • CFA Institute
  • Certified Courses
  • Ask An Instructor
  • Support
  • Log in
  • Topics
    • My List
    • Felix Guide
    • Asset Management
    • Coding and Data Analysis
      • Data Analysis and Visualization
      • Financial Data Tools
      • Python
      • SQL
    • Credit
      • Credit Analysis
      • Restructuring
    • Financial Literacy Essentials
      • Financial Data Tools
      • Financial Math
      • Foundations of Accounting
    • Industry Specific
      • Banks
      • Chemicals
      • Consumer
      • ESG
      • Insurance
      • Oil and Gas
      • Pharmaceuticals
      • Project Finance
      • Real Estate
      • Renewable Energy
      • Technology
      • Telecoms
    • Introductory Courses
    • Investment Banking
      • Accounting
      • Financial Modeling
      • M&A and Divestitures
      • Private Debt
      • Private Equity
      • Valuation
      • Venture Capital
    • Markets
      • Economics
      • Equity Markets and Derivatives
      • Fixed Income and Derivatives
      • Introduction to Markets
      • Options and Structured Products
      • Other Capital Markets
      • Securities Services
    • Microsoft Office
      • Excel
      • PowerPoint
      • Word & Outlook
    • Professional Skills
      • Career Development
      • Expert Interviews
      • Interview Skills
    • Risk Management
    • Transaction Banking
    • Felix Live
  • Pathways
    • Investment Banking
    • Asset Management
    • Equity Research
    • Sales and Trading
    • Commercial Banking
    • Engineering
    • Operations
    • Private Equity
    • Credit Analysis
    • Restructuring
    • Venture Capital
    • CFA Institute
  • Certified Courses
Felix
  • Data
    • Company Analytics
    • My Filing Annotations
    • Market & Industry Data
    • United States
    • Relative Valuation
    • Discount Rate
    • Building Forecasts
    • Capital Structure Analysis
    • Europe
    • Relative Valuation
    • Discount Rate
    • Building Forecasts
    • Capital Structure Analysis
  • Models
  • Account
    • Edit my profile
    • My List
    • Restart Homepage Tour
    • Restart Company Analytics Tour
    • Restart Filings Tour
  • Log in
  • Ask An Instructor
    • Email Our Experts
    • Felix User Guide
    • Contact Support

Modern Portfolio Theory

Explore Modern Portfolio Theory and the extension of this concept into the Capital Asset Pricing Model (or CAPM). As well as, adjustments that have been made to the Modern Portfolio Theory including Arbitrage Pricing Theory, the Black-Litterman approach, and Robust Optimization.

Unlock Your Certificate   
 
0% Complete

13 Lessons (58m)

Show lesson playlist
  • Description & Objectives

  • 1. Modern Portfolio Theory Fundamentals

    05:06
  • 2. Modern Portfolio Theory Efficient Frontier

    05:15
  • 3. Modern Portfolio Theory Workout

    06:00
  • 4. Capital Asset Pricing Model

    07:39
  • 5. Capital Asset Pricing Model Workout

    02:02
  • 6. Security Market Line

    02:30
  • 7. Arbitrage Pricing Theory Differences from Capital Asset Pricing Model

    05:21
  • 8. Arbitrage Pricing Theory Fama French Model

    04:08
  • 9. Arbitrage Pricing Theory Workout

    05:31
  • 10. Black-Litterman Model

    06:42
  • 11. Black-Litterman Workout

    03:35
  • 12. Robust Optimization

    04:28
  • 13. Modern Portfolio Theory Tryout


Prev: Portfolio Risk and Return Next: Active vs Passive Investing

Arbitrage Pricing Theory Workout

  • Notes
  • Questions
  • Transcript
  • 05:31

Arbitrage Pricing Theory Workout

Downloads

APT Workout EmptyAPT Workout Full

Glossary

APT Arbitrage pricing theory Beta modern portfolio theory MPT portfolio risk Standard Deviation
Back to top
Financial Edge Training

© Financial Edge Training 2025

Topics
Introduction to Finance Accounting Financial Modeling Valuation M&A and Divestitures Private Equity
Venture Capital Project Finance Credit Analysis Transaction Banking Restructuring Capital Markets
Asset Management Risk Management Economics Data Science and System
Request New Content
System Account User Guide Privacy Policy Terms & Conditions Log in
Transcript

In this workout, we're looking at an investor that has a Time Horizon of one year and considers the following two stocks and some macroeconomic projections.

We are asked what is the expected return for each stock derived from an Arbitrage pricing Theory or apt model based on unexpected changes and inflation and GDP.

So we've got two different stocks ABC Corp and XYZ Corp, and we've got back to beaters in relation to each of our two factors inflation and GDP growth.

The way that we can identify the expected return on each stock is to look at the surprise factor that we have.

From inflation and GDP growth rates being different from what was expected.

The underlying assumption here is that the expected inflation and expected GDP growth are somehow baked into the risk-free rate of return that we're given of 2% So to help us with this calculation the first thing we're going to have a look at is our formula for our expected return.

And that formula is going to be that our expected return is going to be the risk free rate of return plus the inflation beta for each company.

as our sensitivity to the inflation shock multiplied by that inflation shock or inflation surprise We're then going to add to this.

The GDP beta the sensitivity of each stock to a change in GDP away from the expected level multiplied by that GDP.

shock or surprise So this is the formula that we're going to be using to identify the expected return of each of our two companies.

If we just have a look at the beaters for a second though, we can see that for the inflation beta.

ABC Corp has a negative beta what this tells us is that there is an inverse relationship between the inflation shock and the performance of this company.

If inflation ends up higher than expected this company is going to do badly as a result.

Whereas if inflation is below it's expected level. That will be a good thing for this Company's stock price performance.

XYZ on the other hand as a positive inflation beta so if there's a positive shock inflation is higher than expected. This will add to the return of XYZ Corp.

So let's go down and put the numbers together for this. We're gonna build this up in turn. So we're going to take the risk free rate for both.

They both start off with that expected return of 2% And then for ABC Corp the impact of the inflation differential we need to look at.

What inflation actually was? The 1.5% and subtract from that the expected value.

What this tells us is that inflation is half a percent below what we expected it to be.

But then we need to multiply this by the beta.

And the beta for this Factor? For ABC Corp, is this negative factor of four times? So as a result? Inflation being half a percent below. It's expected level is adding 2% to the return of ABC Corp.

If I then look on to the expected and actual inflation levels, we can then copy this to the right and get the inflation impact for XYZ Corp.

Which is a negative 1.2% the beta but XYZ Corp has of 2.4% indicates that the return on the stock will move in the same direction as the difference between the actual level of inflation and the expected level since we are half a percent below the expected level for the actual level of inflation with multiply through by the beta to give us minus 1.2.

As the implication of inflation being half a percent below its expected level for XYZ Corpus stock performance.

If we then look at the GDP growth effects again same outcome. We need to look at the actual GDP level.

3.5% and subtract from that the expected level of 3% So here we have inflation that is half a percent above its expected level. I'm going to lock onto both of these two factors.

and then for ABC Corp within its pick up the beta Factor here for GDP growth.

GDP growth being above its expected level is a good thing.

For ABC Corp, and it adds an extra 4% return. So overall the expected return for ABC Corp is 8% because inflation is below it's expected level and GDP growth rates are above their expected level. Both of these two factors add to the expected return of ABC Corp.

If I copy this across for XYZ Corp, then we can see that inflation being below its expected level is a bad thing for XYZ Corps to return but they still have a positive impact from GDP growth rates being above their expected level just to a lower degree than ABC Corp because they have a lower beta.

Overall XYZ Corps. Therefore is generating that much lower level of Return of 2.6% because of their positive correlation to the inflation shop level.

Content Requests and Questions

You are trying to access premium learning content.

Discover our full catalogue and purchase a course Access all courses with our premium plans or log in to your account
Help

You need an account to contact support.

Create a free account or log in to an existing one

Sorry, you don't have access to that yet!

You are trying to access premium learning content.

Discover our full catalogue and purchase a course Access all courses with our premium plans or log in to your account

You have reached the limit of annotations (10) under our premium subscription. Upgrade to unlock unlimited annotations.

Find out more about our premium plan

You are trying to access content that requires a free account. Sign up or login in seconds!

Create a free account or log in to an existing one

You are trying to access content that requires a premium plan.

Find out more about our premium plan or log in to your account

Only US listed companies are available under our Free and Boost plans. Upgrade to Pro to access over 7,000 global companies across the US, UK, Canada, France, Italy, Germany, Hong Kong and more.

Find out more about our premium plan or log in to your account

A pro account is required for the Excel Add In

Find out more about our premium plan

Congratulations on completing

This field is hidden when viewing the form
Name(Required)
This field is hidden when viewing the form
Rate this course out of 5, where 5 is excellent and 1 is terrible.
Were the stated learning objectives met?(Required)
Were the stated prerequisite requirements appropriate and sufficient?(Required)
Were the program materials, including the qualified assessment, relevant and did they contribute to the achievement of the learning objectives?(Required)
Was the time allotted to the learning activity appropriate?(Required)
Are you happy for us to use your feedback and details in future marketing?(Required)

Thank you for already submitting feedback for this course.

CPE

What is CPE?

CPE stands for Continuing Professional Education, by completing learning activities you earn CPE credits to retain your professional credentials. CPE is required for Certified Public Accountants (CPAs). Financial Edge Training is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors.

What are CPE credits?

For self study programs, 1 CPE credit is awarded for every 50 minutes of elearning content, this includes videos, workouts, tryouts, and exams.

CPE Exams

You must complete the CPE exam within 1 year of accessing a related playlist or course to earn CPE credits. To see how long you have left to complete a CPE exam, hover over the locked CPE credits button.

What if I'm not collecting CPE credits?

CPE exams do not count towards your FE certification. You do not need to complete the CPE exam if you are not collecting CPE credits, but you might find it useful for your own revision.


Further Help
  • Felix How to Guide walks you through the key functions and tools of the learning platform.
  • Playlists & Tryouts: Playlists are a collection of videos that teach you a specific skill and are tested with a tryout at the end. A tryout is a quiz that tests your knowledge and understanding of what you have just learned.
  • Exam: If you are collecting CPE points you must pass the relevant CPE exam within 1 year to receive credits.
  • Glossary: A glossary can be found below each video and provides definitions and explanations for terms and concepts. They are organized alphabetically to make it easy for you to find the term you need.
  • Search function: Use the Felix search function on the homepage to find content related to what you want to learn. Find related video content, lessons, and questions people have asked on the topic.
  • Closed Captions & Transcript: Closed captions and transcripts are available on videos. The video transcript can be found next to the closed captions in the video player. The transcript feature allows you to read the transcript of the video and search for key terms within the transcript.
  • Questions: If you have questions about the course content, you will find a section called Ask a Question underneath each video where you can submit questions to our expert instructor team.