Summary

In this chapter, we took a brief look at the use of the CAPM model and APT model in finance. In the CAPM model, we visited the efficient frontier with the capital market line to determine the optimal portfolio and the market portfolio. Then, we solved for the security market line using regression that helped us to determine whether an asset is undervalued or overvalued. In the APT model, we explored how various factors affect security returns other than using the mean-variance framework. We performed a multivariate regression to help us determine the coefficients of these factors that led to the valuation of our security price.

In portfolio allocation, portfolio managers are typically mandated by investors to achieve a set of objectives while following certain constraints. We can model this problem using linear programming. Using the PuLP Python package, we defined a maximization or minimization objective function, and added inequality constraints to our problems to solve for unknown...