The Progress of Portfolio Allocation and the Capital Asset Pricing Model

Abstract

This paper aims to discuss the fundamental element in finance, which is the property of the portfolio theory. Also, the paper presents an overview of the evolution of the portfolio theory management and capital asset pricing model (CAPM). Harry Markowitz, James Tobin, and William Sharpe, et al play an indispensable role in the contribution of these financial theories. This paper first studies and then describes the expected return and risk of the single asset portfolio. Then, this paper extends the topic to multiple asset portfolios and teaches people to eliminate or lower the risk in the investment by combining different portfolios. The paper finds the efficient frontier and suggests some possible combinations of risk free assets and risky assets. In addition, given the diverse circumstances, this paper introduces the idea of CAPM. Finally, this paper discusses the current skepticism about CAPM and the future expectation of the important idea in finance.