Markowitz Model had serious practical limitations due to the rigours involved in compiling the expected returns, standard deviation, variance, covariance of each security to every other security in the portfolio. Sharpe Model has simplified this process by relating the return in a security to a single Market index. Firstly, this will theoretically reflect all well traded securities in the market. [...]
In this article we will discuss about:- 1. Meaning of Modern Portfolio Theory (MPT) 2. Basis of Modern Portfolio Theory (MPT) 3. Strategies 4. Mathematical Models. Meaning of Modern Portfolio Theory (MPT): MPT Postulates those savers are generally risk averse and try to reduce risk by all possible methods. The markets are perfect and absorb all information perfectly and returns [...]
Capital Assets Pricing Model (CAPM), referred to Arbitrage Pricing Theory (APT) is an equilibrium model of asset pricing but assumes that the returns are generated by a factor model. Its assumption vis-a-vis those of CAPM are set out first: APT: i. Investors do not look at expected returns and standard deviations. ii. Risk Return Analysis is not the basis. Investors [...]