... According to the Mean-Variance model investors minimise portfolio return variance, given expected return and maximise expected return, given variance. The CAPM is built on the foundations of the following assumptions1: 1. Investors are risk-averse individuals who maximise the expected utility of their wealth. 2. Investors are price takers and have homogeneous expectations about asset returns that have a joint normal distribution. 3. There exists a risk-free asset such that investors may borrow or lend unlimited amounts at a risk-free rate. 4. The quantities of assets are fixed. Also all assets are marketable and perfectly divisible. 5. Asset markets are frictionless, and information is costless and simultaneously available to all investors. 6. There are no market imperfections such as taxes, regulations or restrictions on short selling. The problems of using the CAPM in practice lie in its assumptions. The model assumes there are no transaction costs and no taxes involved when buying and selling securities however, most investments ...

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