This idea based on Harry Markowitz’s theory of portfolio diversification that forms the basis of modern portfolio management (Markowitz, 1952). The reasoning behind the model is that an investor should not worry about the individual changes the stock returns (unique risk), but only about the changes in the stock returns that correlate with changes in market returns. However, a more simplistic model usually takes a large stock index as a proxy for market portfolio. Ideally, the market portfolio includes all types of observable assets including equities, fixed income securities, and physical assets. The underlying concept behind the CAPM is that investors can easily diversify their unique risks and are only systematic risk – the risk inherent in a market portfolio.
The Capital Asset Pricing model attempts to price various assets in accordance with their riskiness relative to an all-encompassing market portfolio. In the light of the above answer, how useful do you think reliance on the model is for an investor?.Present and briefly comment on the economic evidence in the literature with regard to this model.WritePass - Essay Writing - Dissertation Topics
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