# 2-5: How hedge funds use the CAPM

## Two stock scenario

In this scenario, we've used some machine learning model to predict that a
particular stock, **A**, will be +1% over the market and stock **B** will be
-1% below the market. Given this, we take a long and short position to make a
profit. A high-level overview from the lectures on how to calculate these
returns using **beta** under these circumstances is provided below:

## Two stock takeaways

The below snippet from the lecture reinforces that, if we're not careful with
how we allocate our money, we could end up losing money taking **short**
positions in an upward trending market, and **losing** money taking **long**
positions in a downward trending market. Basically, you need to hold the right
stocks with the right **beta** for the right market.

## Two stock CAPM math

The lecture takes the examples provided earlier and uses **CAPM** to simplify
the math into a regression equation. The point of this lecture is to state that
we can remove market influence on our portfolio if we aim to minimize **beta**
to 0.

## Allocations to remove risk

The lecture covers how to calculate allocations, `W[i]`

, to remove risk from a
portfolio.

## Wrapping up

The lecture covers how to calculate returns when the market has a **10%**
increase, given the allocations we calculated previously to remove market
influence on the portfolio.