Problem:
Now that you have read about the CAPM, would you ever use it to make personal investment decisions?
Consider the following:
What is the main message of the CAPM? It evolves from the notion that investors in general aren't stupid: they diversify their investment funds into a well diversified portfolio. Therefore, if we all are wise enough, it follows that the 'market won't compensate people for not being smart enough to diversify. More specifically - the main message of the CAPM is that the rate of return one should expect to earn on a particular investment is only related to the systematic risk of the secuirty, not to its total risk. When you purchase a stock, because you like it or because you got a 'tip', you'll be exposed to the total risk of this stock, but the market theory implies that you'll only be compensated for a small proportion of that risk. Hence, if you do like risk you should invest in a well diversified risky portfolio with many securities having a high beta, rather than in an individual stock.