FINC314 Lecture Notes - Lecture 15: Harry Markowitz, Capital Asset Pricing Model, Perfect Competition
10 Feb 2020
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Document Summary
We have now discussed the groundbreaking work of harry markowitz which comprises the basis of. The answer: the capital asset pricing model (capm). The capital asset pricing model (capm) is a set of predictions concerning equilibrium expected returns on risky assets. The capm relies on a number of assumptions: first, there are many investors, each with an endowment (starting wealth) that is small compared to the total endowment of all investors. Investors are price-takers, in that they act as though security prices are unaffected by their own trades. This is the usual perfect competition assumption of microeconomics. What do you think about this particular assumption: second, all investors plan for one identical holding period. This behavior is myopic (short- sighted) in that it ignores everything that might happen after the end of the single-period horizon. In reality there are different holding periods, so this requires some simplification.
