FactorPad
Faster Learning Tutorials

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.
  1. Define - Define Capital Market Theory.
  2. Context - Use it in a sentence.
  3. Quiz - Test your knowledge.
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.

Outline Back Next

~/ home  / finance  / glossary  / capital market theory


Capital Market Theory

Intermediate

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.

Video

Many terms have 4-5 minute videos showing a derivation and explanation. If this term had one, it would appear here.

Videos can also be accessed from the YouTube Channel.

Video Script

If this term had a video, the script would be here.

Quiz

Click box for answer.

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

Increases

Questions and Comments?

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.

Related Terms

Our trained humans found other terms in the category academic works you may find helpful.


What's Next?

Subscribe and explore the hundreds of videos at the FactorPad Channel.

  • To see all terms in the Glossary, click Outline
  • To learn about the related Capital Market Line, click Back.
  • For a description of common stock, Click Next.

Outline Back Next

~/ home  / finance  / glossary  / capital market theory



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