[Verse 1] Picture all your investments scattered wide Some go up while others fall and slide There's a clever way to balance risk and gain Plot them on a curve, let math explain Expected return on the vertical line Variance horizontal, now you'll find The efficient frontier shows the best Where risk meets reward at its finest test [Chorus] Mean variance optimization, find your efficient line Minimum variance portfolio, where risks decline Capital allocation dancing with the market's call CAPM and beta measure systematic fall Alpha tells the story of the excess that you earn Portfolio theory lessons that every analyst must learn [Verse 2] Beta measures how your stock will move When the market rises, does it groove One means perfect correlation with the flow Less than one means calmer, more means go Systematic risk affects us all the same Unsystematic risk you can reduce and tame Diversification is the magic key Spread your holdings wide and you'll be free [Chorus] Mean variance optimization, find your efficient line Minimum variance portfolio, where risks decline Capital allocation dancing with the market's call CAPM and beta measure systematic fall Alpha tells the story of the excess that you earn Portfolio theory lessons that every analyst must learn [Bridge] Fama French discovered factors three Market size and value, now you see Carhart added momentum to the mix APT finds factors that predict Tracking error measures how you stray Information ratio shows the way Active share reveals how much you bet Against the benchmark that you're set [Verse 3] Risk budgeting helps you allocate How much tracking error you can take Behavioral biases cloud our mind Overconfidence leaves logic behind Anchoring bias keeps us stuck in place Loss aversion shows in every face Mental accounting splits what should be whole These human flaws can take their toll [Chorus] Mean variance optimization, find your efficient line Minimum variance portfolio, where risks decline Capital allocation dancing with the market's call CAPM and beta measure systematic fall Alpha tells the story of the excess that you earn Portfolio theory lessons that every analyst must learn [Outro] From efficient frontiers to factor models true Portfolio theory guides what investors do Balance risk and return with scientific art These timeless principles will set you apart
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