Capital Market Expectations

Capital Market Expectations

The capital market theory builds upon the Markowitz portfolio model. The main assumptions of the capital market theory are as follows:

1. 1. All Investors are Efficient Investors – Investors follow Markowitz idea of the efficient frontier and choose to invest in portfolios along the frontier.
   2. Investors Borrow/Lend Money at the Risk-Free Rate – This rate remains static for any amount of money.
   3. The Time Horizon is equal for All Investors – When choosing investments, investors have equal time horizons for the choseninvestments.
   4. All Assets are Infinitely Divisible – This indicates that fractional shares can be purchased and the stocks can be infinitely divisible.
   5. No Taxes and Transaction Costs –assume that investors’ results are not affected by taxes and transaction costs.
   6. All Investors Have the Same Probability for Outcomes –When determining the expected return, assume that all investors have the same probability for outcomes.
   7. No Inflation Exists – Returns are not affected by the inflation rate in a capital market as none exists in capital market theory.
   8. There is No Mispricing Within the Capital Markets – Assume the markets are efficient and that no mispricings within the markets exist.

Back to Tutorial