Portfolio Choice with Leverage Constraints

This lecture covers the optimal portfolio choice with leverage constraints, including leverage and margin constraints, the security market line, alpha with respect to the market, and the empirical evidence on the risk-return trade-off. It also discusses the realism of the Capital Asset Pricing Model (CAPM) theory, the limitations of CAPM in practice, and extensions like the Arbitrage Pricing Theory (APT). The lecture concludes by exploring the relationship between average returns and standard deviation, the Fama-French-Carhart four-factor model, and the fundamental insight of modern finance regarding systematic risk and equilibrium returns.