Manag., December-2019 – Q37
0. The major factor that allowed Portfolio Theory to develop into Capital Market Theory is
- Option : A
- Explanation : Development of Capital Market Theory: The major factor that allowed Markowitz portfolio theory to develop into capital market theory is the concept of a risk-free asset, that is, an asset with zero variance. As we will show, such an asset would have zero correlation with all other risky assets and would provide the risk-free rate of return
(RFR).
This assumption of a risk-free asset allows us to derive a generalized theory of capital asset pricing under conditions of uncertainty from the portfolio theory. This achievement is generally attributed to William Sharpe (1964), who received a Nobel Prize for it, but Lintner (1965) and Mossin (1966) derived similar theories independently.
