 In this section, I will explain how capital asset pricing model can be used for developing a portfolio. So when we follow the method of CAPM, we will come up, it is assumed that we will come up with a portfolio that can be termed as an efficient portfolio because it is based upon the assumptions that when we are deciding among different options that are available to an investor, they always go for that combination which will yield the highest possible return or reward at a certain given value of risk. So when an investor decides based upon the method defined by capital asset pricing model, they take into account the strategy of passive investing strategy. That means that they will have to take into account the information regarding the index that represents the overall performance of the total market, aggregate market. They will have to take into account the values for the risk-free returns as a standard. And then by considering these two values as a benchmark, they decide which particular investment security they should go for that will yield the highest reward given a certain level of risk. So when we look at the portfolio selection procedure defined by capital asset pricing model, it is suggested that firstly, we need to take into account the risky assets. So you have to consider the amount for total investment and put in the amount of risk and then you have to follow the diversification principle and then you decide how much money to put in the risk-free asset and then you have to take into account the particular information that how is your return overall, which is your market portfolio. This is how you are going to form that. So for doing that, people always go for the information regarding the managed portfolio. Now what is meant by a managed portfolio? Managed portfolio is a standard portfolio which is based on the principle of passing investing strategy and they are saying that you will account for a benchmark in the investment strategy. To have an idea of how your overall market has been performing, how much is the average return overall. If you take risk, then what is the risk premium you should take? If you do not want to take the risk, then the minimum return, the risk-free return which we are talking about, what will happen? So these are the important things that are to be considered when we are going for CAPEM to decide for us how our portfolio selection will be. Now I am going to explain this concept using an example. Suppose you have 1 million dollars for investment and you have 3 kinds of opportunities in which you can invest 1 million dollars. First you have some stocks in which you can invest, then you have bonds in which you can invest and third you have a risk-free asset in which you can invest. So together you have got 3 different types of financial assets in which you have to divide the investment of 1 million dollars. Now if we assume that our stocks and the market value of bonds is available in the total market with a ratio of 60% to 40%, then when we are following CAPEM, then there was an assumption that according to the market value, there are different financial assets in which you want to invest, the same ratio will be followed in your portfolio in the total market. So if 60% stocks are available in the market and the total market value is 60%, the total value is formed and the remaining 40% is the value of bonds. So your portfolio will follow CAPEM's method, then the composition of that portfolio will also go according to 60-40%, that is, stocks will be 60% in your portfolio and bonds will be 40%. So we will follow this ratio there as well. Now the process is that the investors, the experts who make decisions for you, what they do is they will compare the rate of return that can be earned on the managed portfolio. So that is termed as a managed portfolio. So you have to take that information as a standard and you have to compare any certain stock or security return, expected return of this particular managed portfolio with expected return. So what we should do is, if we want to invest money in certain security, for example, money in the lucky cement, the return that is coming from it, the total return market that gives you, is better than this, is more or less than that. So we have to decide a managed portfolio. Now you are going to take into account the expected rate of return on the management portfolio. rate of return on the managed portfolio, then you will account for the expected rate of return in any security or securities you want to invest in that particular information, then you will account for the risk-free asset return. and you have to define the portfolio in the way that the market value is defined in the market, as I told you a while ago. Once you have considered the expected rate of return of the three things, I have told you three things, one is the expected rate of return of the managed portfolio, the second is the risk-free financial instrument like the Treasury Bill, the rate of return and the specific stocks you want to invest in. You have to compare these three things and you have to take another important information and that is the volatility, i.e. the risk-major volatility means standard deviations, you will account for the volatility of the managed portfolio will be considered and that will be computed for the same period for which you will account for the volatility of your particular rate of return. Now the average rate of return will be estimated, you have taken the rate of return, then you will calculate the average rate of return and that average rate of return will be compared with the rate of return of the managed portfolio. You have to compare the average rate of return with the rate of return of the standard and you will always invest in any combination or portfolio. When your average expected rate of return from that securities matches with the expected rate of return of the managed portfolio, if it works then you will never invest in such a combination. So the managed portfolio is basically the benchmark portfolio which you are using as a reference to decide whether or not you are going to invest in the portfolio of your choice in which you want to invest in that combination. If you are going to invest in that combination or not then you have to compare it with the benchmark portfolio or the one we are talking about in this discussion.