 Capital market theory urges investors to invest in risk-free assets and the portfolio of risky assets. Now the investment combination of these two types of assets gives the concept of diversification and the corresponding riskiness. We know that portfolio M lies on a point of tangency and this means that this point includes all possibility portfolio with the highest level. Then this is the reason that everybody will want to invest in the portfolio M and the investors also want to lend or borrow at the risk-free ranges to remain on the capital market line. This means that the portfolio M should include all the risky assets. Having an equilibrium market portfolio in M includes all assets in consistency to their level of riskiness. Now we can say that portfolio M is a fully diversified portfolio because all the unique risk of the individual assets have been fully diversified. What is systematic risk? Systematic risk is the variation in all risky assets due to certain macroeconomic variables that remain inside the market portfolio or the portfolio M. The systematic risk can be measured by this standard deviation of returns of the market portfolio. The systematic risk changes over time due to changes in the macroeconomic forces like growth in the money supply, interest rate volatility, industrial productivity, corporate earnings and the corporate cash flows. How to measure diversification? We know that all portfolios on CML are perfectly positively correlated with each other and with the perfectly diversified market portfolio M. That is the basic feature of portfolios that lie on the CML. This means that a completely diversified portfolio would have a correlation with the market portfolio of plus one. That means that the market portfolio and the diversified portfolio, the returns on these two different portfolios will go side by side in the same direction. A completely diversified portfolio correlates perfectly with the portfolio M, which means that this has only a systematic risk. How to eliminate the unsystematic risk? The answer is the diversification because the diversification aims to reduce the portfolio riskiness. It assumes imperfect correlation exists among the securities and as we add securities to the market portfolio, we expect the average covariance for the portfolio to decline. Now the question arises that how many securities must be added to obtain a completely diversified portfolio? The answer is that you need to see what happens when securities with positive correlation are added to the portfolio. If we add stocks to the portfolio that are not perfectly correlated with the stocks already held in the portfolio, then the overall portfolio riskiness can be reduced. This means that we will finally reach the level of portfolio M that has no riskiness. This means at that point all the systematic risk is diversified away, so the diversification objective is met here. However, still the market or the systematic risk exists in the portfolio because the variation and the uncertainty of the macroeconomic factors is affecting all the risky asset and this cannot be eliminated. In the diagram, we see that at the vertical axis we have standard deviation or the riskiness of returns and on the horizontal axis we have number of stocks in our portfolio. As we add the number of stocks into our portfolio, the riskiness goes on decrease but at a certain level it may not go down further because of the macroeconomic factors. But the separation theorem says in the presence of the CML. We know that CML leads all investors to invest in the market portfolio and individual investors should differ in position on the capital market line depending on their individual risk preferences. This means getting position on CML is an investor's financing decision. That is his choice depending upon his financing decision. As risk averse investors will lend part of the portfolio at the risk-free rate and invest the remainder investment in the risky assets portfolio. This means that a risk-loving investor then might love to borrow funds at the risk-free rate and he will be loving to invest the whole amount means whole borrowed amount plus his own investment all the entire money he would be loving to invest in the market portfolio. Now what the separation theorem says it says that investment decision is related to the initial decision of the investor when he decides to invest in the portfolio M and the subsequent decision to borrow or lend to obtain a point on the CML is the financing decision. The separation between these two decision is termed as the separation theorem as described by Tobin. Then what is the risk measure of CML, how CML's riskiness is measured, it is said that an asset's return in relation to the portfolio's M return. So we see in the equation that a return on asset has a linear relationship with the market return. Then the variance of return for the riskiness asset can be measured in terms of the betas of the individual asset. We see that in the equation the individual asset's riskiness is linked linearly with the riskiness of the portfolio's return or the market return. And this means that any investor should expect only to be compensated for the systematic risk because it cannot be diversified anymore.