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Capital market theory followed modern portfolio theory by Markowitz, as researchers explored the implications of introducing a risk-free asset. Sharpe is generally credited with developing the CAPM, but Lintner and Mossin derived similar models independently in the mid 1960s. Assumptions made regarding Capital Market Theory include:
All investors are Markowitz e¢cient investors who choose investments on
the basis of expected return and risk.
Investors can borrow or lend any amount at a risk-free rate of interest.
All investors have homogeneous expectations for returns.
All investments are in…nitely divisible.
No transactions costs or taxes, no in‡ation or any change in interest rates
and capital markets are in equilibrium.
