The merge between financial theory and practical investing was greatly observed in the 1950s
and 1960s with the formulation of portfolio theory by Markowitz (1952) and later on the
Capital Asset Pricing Model of Sharpe (1964) and Lintner (1965) which was built on the basis
portfolio theory. Current financial theory is based on three critical assumptions which are (i)
market efficieny (ii) there are arbitrage opportunities for investors and (iii) rationality of
investors. The Markowitz the-ory of Markowitz (1952) is a theory that aims to optimize expected
discounted re-turns in an investment at a minimum variance thus achieving an efficient
frontier for portfolio selection based on the expected returns - variance of returns rule.
Markowitz (1952) further suggests that there is need for a probabilistic formulation of
security analysis and outlines that better methods that account for more infor-mation can be
found.
