Question

Do NOT put ALL eggs in ONE basket!

What you have learned for this saying?

Does portfolio theory work for you in your experience?

CAPM model

In practice, how CAPM model could help investors to pick up stocks to invest?

Answer 1

The proverb not to put all the eggs in one basket meant to prove the point, Asset Diversification, Portfolio Diversification in order to save oneself from the risky market, not completely but strategically. Diversification can be achieved when one holds different equities, bonds with different risk and return profiles, from different industrial environments. Holding onto one company and not managing the weights of the stock is holding onto the risk that can sweep the money off your feet. In order to avoid that, one would want to invest in many different types of stocks and compensate the risk with different types of strategies.

Portfolio holds different stocks that may be correlationally co-efficient positive or negative in nature. And definitely works with the different asset allocations with respect to the risk appetite of the investors. Also to meet the liquidity and withdrawal needs of an investor. Time horizon matters too.

CAPM model helps investors to pick the stocks by decide what they're going to get as a return over the investment that they'd make. CAPM focuses on risk and return of the portfolio and let's the investors understand if they get a return of 45%, that means they may get risk-free rate of around 10% and other other 35% to be risk premium.