Skip to main content Accessibility help
  • Print publication year: 2011
  • Online publication date: June 2012

1 - Introduction


The Mean-Variance Rule and the Capital Asset Pricing Model: Overview

Harry Markowitz and William Sharpe were awarded the Nobel Prize in Economics in 1990 for the development of the Mean-Variance (M-V) framework and the Capital Asset Pricing Model (CAPM), respectively. In 2002, this prize was awarded to Daniel Kahneman for the development of Prospect Theory (PT), which contradicts Expected Utility Theory (EUT), on which the M-V framework and the CAPM are based. Is the Economics Nobel Committee inconsistent?

The PT criticism of EUT, which indirectly also criticizes the M-V model and the CAPM, is just one of the mounting empirical and theoretical criticisms of the M-V framework in general, and, in particular, the CAPM, criticisms that imply that one cannot conduct theoretical research or implement practical investment strategies with them. However, the observed extensive academic research and investment strategies, which rely on the M-V and the CAPM, indicate that by the same token, academics and practitioners cannot conduct their research, teaching, and financial analysis and services without them either.

Related content

Powered by UNSILO
Tobin, J. 1958
Hanoch, G.Levy, H. 1969
Hanoch, G.Levy, H. 1970
Markowitz, H. M.Portfolio Selection: Efficient Diversification of InvestmentsCambridge, MABasil Blackwell
Levy, H.Markowitz, H. M. 1979
Markowitz, H. M. 2010
Markowitz, H. M. 1952
Sharpe, W. F. 1964
Lintner, J. 1965
Schwert, G. W.Anomalies and Market EfficiencyConstantinides, G.Harris, M.Stulz, R. M.Handbook of the Economics of FinanceNorth Holland 2003
Fama, E. F.French, K. R.The Cross–Section of Expected Stock ReturnsJournal of Finance 1992
Kahneman, D.Tversky, A. 1979
Tversky, A.Kahneman, D. 1992
Sharpe, W. F. 1963
Levy, H.Markowitz, H. M. 1979 314
Sharpe, W. F. 1991
Bodie, Z.Kane, A.Marcus, A. J.InvestmentsMcGraw-Hill 2010
Brealey, R. A.Myers, S. C.Allen, F.Principles of Corporate FinanceMcGraw-Hill 2011