Security pricing and hedging
Mean Variance Optimization Model vs. Capital Asset Price Model
Q1. Capital Asset Pricing Model (CAPM) as well as Mean Variance Optimization Model are based on certain assumptions that help an investor or a user to apply these models before taking a decision. The underlying assumptions of both the models are:
- Every investor has an aversion to risk and given a choice with the same amount of returns, every investor will choose the less risky investment.
- Risk is taken in proportion to the risk premium but in inverse proportion to the variance of returns and the investor’s Continue reading...