Capital Markets: Theory and Evidence

TLDR

The paper reviews mean‑variance capital market theory, focusing on how the Markowitz portfolio model and the Sharpe‑Lintner CAPM explain asset price determination under uncertainty. The paper reviews the foundations and current state of mean‑variance capital market theory. The review covers the core characteristics of the models, current empirical evidence, and recent extensions, integrating them with available data.

Abstract

This paper is a review of the foundations and current state of mean-variance capital market theory. This work, whose foundations lie in the mean-variance portfolio model of Markowitz, deals with the determination of the prices of capital assets under conditions of uncertainty. The Sharpe-Lintner capital asset pricing model which forms the core of this body of literature is an investigation of the implications of the normative Markowitz model for the equilibrium structure of asset prices. The essential characteristics of these models are reviewed along with the current state of the empirical evidence bearing on them. Many of the recent extensions of the theory are also reviewed and some attempt is made to integrate these extensions with the currently available empirical evidence.