Harry Markowitz's Capital Asset Variance Model

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Harry Markowitz is highly regarded as a pioneer in theoretical justification of investor’s behavior and development of optimization model for portfolio selection process. In 1990, Markowitz shared a Nobel Prize for his contributions to financial economics and corporate finance, the first time presented in his “Portfolio Selection” (1952) and more extensively in his monography “Portfolio Selection: Efficient Diversification (1959). His seminal works formed the foundation of what is now popularly known as Modern Portfolio Theory (MPT). This foundation was later substantially expanded by Markowitz’ fellow Nobel Prize co-winner, William Sharpe, who is generally recognized for his Capital Asset Pricing Model (CAPM) concerning with financial asset price formation.…show more content…
Yet, in his monography he intentionally characterizes the model only as normative theory. Conversely, Sharpe’s CAPM is regarded as a positive theory. Together, they provide a theoretical framework for development of relationships between expected return and risk and the measurement of the latter. (Fabozzi, Gupta, & Markowitz, 2002). H. Markowitz describes his work and that of Sharpe and Lintner as part one and part two of a microeconomics for capital markets (Noble Lecture 1990). We can generalize that Modern Portfolio Theory comprises Markowitz Portfolio Selection theory and William Sharpe’s Capital Asset Pricing Model (“CAPM”) (Veneeya, 2006). In this work we confine to the “part one of a microeconomics of capital markets”. In that regard, referring to MPT we mean solely Markowitz’s contribution to

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