Modern portfolio theory is not so modern anymore, but it still has a strong influence on how portfolios are analyzed and constructed. In this module we will discuss the theoretical framework behind the principles of modern portfolio theory, including the capital market line and security market line. We will also discuss one of the most controversial elements of modern portfolio theory: the efficient market hypothesis. Its proponents argue that beating the indexes is next to impossible; its detractors argue that the anomalies to the theory support active management. This module will consider the arguments on both sides.