Portfolio theory provides a normative approach to investing based on which of the following assumptions?

A. Risk-return spread is uniform for all asset classes

B. Investors are risk-averse

C. Market risk pricing is identical for all investors

D. Return on assets are normally distributed

E. Uniform investment horizon

Choose the correct  answer from the options given below:

Key Points

Markowitz Theory of Portfolio Management:

• It is a theoretical framework for the analysis of risk and return and their inter-relationships.
• As per this, an efficient portfolio is expected to yield the highest return for a given level of risk or the lowest risk for a given level of return.

Important Points

Assumptions of Markowitz's Theory:

• Investors are rational and behave in a manner to maximise their utility with a given level of income or money.
• Investors have free access to fair and correct information on returns and risks.
• The markets are efficient and absorb information quickly and perfectly.
• Investors are risk averse and try to minimise the risk and maximise return.
• Investors base decisions on expected returns and the variance, or standard deviation, of these returns from the mean.
• Returns on assets are normally distributed.
• Investors choose higher returns than lower returns for a given level of risk.

Therefore, the correct answers is B, C and D only