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Capital Market Theory definition

The assimilation of computers in the late 1950s and early 1960s gave scholars the ability to think about asset valuation in a whole new, and very scientific way.
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by Paul Alan Davis, CFA, October 18, 2016
Updated: December 16, 2018
Sometimes the Capital Market Theory is confused with Modern Portfolio Theory, so here we'll clear that up.

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Capital Market Theory


Capital Market Theory is the theory developed in the 1960s and made popular by William Sharpe. It piggybacked on Modern Portfolio Theory but added a risk-free asset to portfolio mix. This allowed investors to build portfolios with two components: the risk-free asset, like Treasury Bills, and a Market portfolio which maximizes the return-over-risk ratio of all risky assets. This changed portfolio choice from the efficient frontier to the straight line from the risk-free rate to the Market portfolio, and the concept of multi-asset-class allocation was born.

Synonym: CMT

In a Sentence

Doc:  Who else was working independently on the Capital Market Theory? 
Mia:  I know. Jack Treynor, John Lintner and Jan Mossin.


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What is a byproduct of The Federal Reserve lowering interest rates? This action theoretically ____ the reward-to-risk ratio for investors. | Decreases or Increases?


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Still unclear on the Capital Market Theory? Try out the course Quant 101 and specifically the tutorial with video called Ace Your Portfolio Theory Exam.

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capital market theory
william sharpe
modern portfolio theory
risk free asset
market portfolio
maximize return
risk adjusted return
portfolio choice
efficient frontier
stock valuation
portfolio thoery
asset allocation