CAPM

Previous sections presented a method for identifying an investor's optimal portfolio. The investor estimates the expected returns and variances for all securities under considerations and once that is done, he can simply pick the optimal portfolio for his indifference curves from the efficient frontier. Such an approach to investing is often labeled normative economics, since here the investors are told what they should do. Now we enter the realm of positive economics, where a descriptive model of how assets are priced is presented. This model, the Capital Asset Pricing Model assumes that all investors use the normative approach for investing.