Compare the assumptions needed for the CAPM with those needed for Markowitz’s Portfolio Theory.

Compare the assumptions needed for the CAPM with those needed for Markowitz’s Portfolio Theory. 

Assumptions of CAPM 

1. Investors consider expected mean and variance of return while deciding about investment. 

2. Investors are risk averse utility maximizers. 

3. Investors have a single period time horizon which is same for all investors. 

4. Their expectations are identical about expected returns, variances and covariance for all risky assets. 

5. Unrestricted borrowing and lending can occur at risk free rate of interest; There are no imperfections in the capital market such as transaction costs There are no taxes. 

Assumptions of Markowitz Portfolio Theory 

1. Investors consider expected mean and variance of return while deciding about investment. 

2. Investors are risk averse utility maximizers. 

3. Investors have a single period time horizon which is same for all investors. 

4. Their expectations are identical about expected returns, variances and covariance for all risky assets.