# Portfolio theory and the capital asset

The main assumptions of the capital market theory are as follows: All Investors are Efficient Investors - Investors follow Markowitz idea of the efficient frontier and choose to invest in portfolios along the frontier. The Time Horizon is equal for All Investors - When choosing investments, investors have equal time horizons for the choseninvestments. As we discussed above, the most common used risk-free rate is the 3-month T-Bill rate from the US Treasury. I think this will be a good rate to use because it is commonly used and we are using 6 American companies as our population of securities, so it makes sense to use an American Treasury rate.

You are not limited to the 3-month US rate. You can use a 3-month rate from any financially stable country, such as Canada or Germany. From this data, we see that the US 3-month T-Bill rate is at 0. However, this is an annualized amount. Our data in our Excel file is monthly, so we need to transform the 0.

Since the risk-free rate is just an estimate of a theoretical risk-free rate, we can use a simple method to compute the monthly risk-free rate. This will give you a monthly rate of. If that sounds pretty low, it is.

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The reason it is so low right now is that the US government continues to keep interest rates low to stimulate the economy towards recovery. Now that we have the rate, we can enter it into our Excel file.

We are also going to enter its SD which is zero for use in calculations and charts. Your file should look something like this: The next step is to compute Theta the Sharpe Ratio of our portfolio.

Enter this into your Excel file. It should look something like this: I placed my tables below the Efficient Frontier table. They look like this:Markowitz Portfolio Theory • Combining stocks into portfolios can reduce standard deviation, below the level obtained from a simple weighted average calculation.

• Correlation coefficients make this possible. • The various weighted combinations of stocks that create this standard deviations constitute the set of efficient portfolios efficient portfolios.

The capital asset pricing model (CAPM) of William Sharpe () and John Lintner () marks the birth of asset pricing theory (resulting in a Nobel Prize for Sharpe in ).

Before their breakthrough, there were no asset pricing models built from first principles about the nature of tastes and. Intertemporal Portfolio Theory and Asset Pricing Douglas T. Breeden The intent of this entry is to present intertemporal portfolio theory and asset pricing models, to known as the capital asset pricing model (CAPM).

This model was the premier general theoretical model of asset pricing, prior to. Portfolio theory, exploring the optimal allocation of wealth among dif- ferent assets in an investment portfolio, based on the twin objectives of maximising return while minimising risk, owes its . “modern portfolio theory.” The Capital Asset Pricing Model of Sharpe, Lintner, and Mossin is the origin of these formal constructs. The constructs of the CAPM are important building blocks that retain validity in numerous applications, even where the CAPM fails. 06/04/ 2 figure lending and borrowing harry markowitz and the birth of portfolio theory a b return risk (measured as σ) harry markowitz and the birth of.

Relevance of Portfolio Theory and Capital Asset Pricing Model Essay