The relevance of portfolio theory and the capital asset pricing model Essay

The relevance of portfolio theory and the capital asset pricing model to an investor or fund manager in the equity markets - Essay Example rd from the portfolio theory and further evaluates the risks that an investor will be bearing upon buying a portfolio; under the assumption that this is risk that the investor will have to bear no matter what he does. Fund managers and investors need to then decide whether or not an investment is worth making based on this information. Although the two help bring to light the various aspects of market risk, they are still not a 100 percent reliable which will be further discussed. The portfolio theory revolves around the selection of the best investment strategies in terms of risk; i.e. it focuses on the risk surrounding the equity market and the return or gains from any transactions. In essence an investor or fund manager would need to look at the portfolio theory to make a clear contrast between what is risk and what is simply uncertainty. The fact is that any discussion of an equity market will need some insight on the aspects of the risk associated with any venture or portfolio. This is imperative due to the nature of the equity business which is primarily based on risk itself, and also has a hand in defining the way market values of investments are given foundation (Brentani 2004). It is the idea of risk versus return which is mainly what attracts an investor or fund manager to a portfolio. Theoretically speaking one would want to create such a portfolio which offered an insight into the best risk-return opportunities against the given set of risk constrictions. This would enable the investor to increase the chances of maximizing his returns. An efficient portfolio will not only help him do this but also attain a higher return as opposed to a lower one. Practically speaking, using the portfolio theory is important because the outcome of risk and return is unknown. It is because of risk that there is more than one possibility for an investor or fund manager; this includes returns that are on the mark, higher and even lower than previously expected. Without