ABSTRACT

Modern portfolio theory introduced by Markowitz has become a broad theory for portfolio selection. He demonstrated how to reduce a standard deviation of return on a portfolio of assets. The Markowitz theory of portfolio management deals with individual assets in financial markets. It combines probability theory and optimization theory to model the behaviour of investors. If everybody uses the mean-variance approach to investing, and if everybody has the same estimates of the asset’s expected returns, variances, and covariances, then everybody must invest in the same fund F of risky and risk-free assets. In capital asset pricing model (CAPM), the return of each asset is assumed as a regression model with a single explanatory variable, which implies that the market risk is the only source of risk besides the unique risk of each asset. In CAPM, the return of each asset is assumed as a regression model with a single explanatory variable.