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This is the oldest theory or return and risk concept derived from consumer behaviour
concept. It tries to maximize the utility of the the investor and it believes that utiity has
only two factors.
1. Risk
2. Return
When return increases, utility also increses but at decreasing rate. When risk increases
utility decrease at increasing rate. Markowitz measures returns through mean average and
risk through standard deviation.
CAPM
(Captital Assets Pricing Model)
Essential Conclusions of CAPM:
1. Return is Linearly Related to Systematic Risk
2. The Market does not Pay for Accepting Unsystematic Risk, since such risk can be avoided
by the simple process of diversification is a measure of Systematic Risk and that optimal
portfolios may be constructed by varying the mix between a risk-free asset & the market
portfolio.