Articles on CAPM model

This blog has a entry to some essays written by Arnold Kling about the Capital Asset Pricing Model (CAPM) developed by Fischer Black.

It is worth reading all the essays. They are easy to find by using the articles by the same author link on the left side of the techcentral station website.

It gave me a couple of ideas on how to get the most diversified portfolio. Basically you want to hold stocks which have a very low correlation with each other (or covariance). I had a quick google for ASX share betas and didn't find much. Most stock betas relate the stock's correlation to the market. In a way that is bad, considering that some indexes are weighted and therefore the correlation is actually a correlation to the those (more heavily weighted) stocks.

On the ASX there are plenty of indexes available and even some exchange tradable funds which are index funds.
So is holding a index fund the most diversified portfolio available to an Australian based investor?
If there exists a most diversified portfolio, how was it's performance against the index over the last 2,5 and 10 years?
To be competitive with an index fund, the portfolio will need to minimize the number of rebalancing actions required to reduce the overall transaction cost.

The other interesting idea from the CAPM is that individual investors control their risk exposure. One example was taking a low risk stock and using margin (debt) to leverage into a higher risk.

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