Question

briefly explain the difference in assumptions underlying portfolio theory and the capital asset pricing model( CAPM)

Answer 1

The portfolio theory initially introduced by Harry Markowitz and this theory explains how rational investors diversifying and creating an efficient portfolio of investments . This help the investors minimise the investment risk without compromising returns in a perfect market condition.Variability of possible returns about the mean measured by the standard deviation determines the risk of each portfolio. The portfolio theory expresses the relationship between risk and return and their portfolio application for risk aversion.Efficient portfolios where highest and lowest return yield expectations for certain risk levels are explained under this theory

The CAPM theory assumes that investors are risk averse in nature . The ERR ( expected rate of return) and Standard deviation of return are the base for risk and return calculations.Based on a single period horizon, investors makes decisions and taxes do not affect their asset purchase decisions .This theory make use of Security market line and its relationship between expected return and systematic risk.