Theories of asset pricing:

Having grasped the concept of risks and returns associated with financial assets, let us now look at some theories that have been put forward to explain how prices of financial assets are formed and determined. We discuss three main theories, mean- variance portfolio theory mainly associated with Harry Markowitz, who put it forward in the 1950s; the Capital Asset Pricing Model, the basis of which was laid by William Sharpe in 1964, by John Linter in 1965, and Jan Mossin in 1966; and finally, the Arbitrage Pricing Theory developed by S.A. Ross in 1976. Markowitz and Sharpe have received the Nobel Prize in economics for their pioneering theories.