DefinePK

Abstract

The basis for asset pricing in financial markets was provided by Bachelier (1900) in his magnificent dissertation “Théorie de la Spéculation” submitted at Sorbonne (Université de Paris). Although from today’s perspective, the mathematics and economics he applied were flawed, yet the great genius, Markowitz, declares this early work as an inspiration for his own classical paper of “Portfolio Selection”. The risk return relationship has always been a debatable issue in financial theory. “Portfolio Selection” came up with a meaningful measure of quantifying the risk associated with investment; the variance of returns. The equilibrium model of Capital Asset Pricing (CAPM) (Sharpe 1964, Lintner 1965, Mossin 1966) further classified the risk as relevant and irrelevant risk. According to the CAPM, the relevant risk is the systematic risk or non diversifiable risk. The systematic risk is the volatility of returns of a particular stock to the market returns.