Stock Market Anomalies in Modern Portfolio Theory

Date of Graduation

Fall 1989


Master of Business Administration


Management and Information Technology

Committee Chair

Dane Peterson


The development of modern portfolio theory was largely induced out of the need to accurately predict investment risk and return. Markowitz was the pioneer in developing modern portfolio theory with his efficient frontier. The efficient markets hypothesis and the capital asset pricing model added to the body of modern portfolio theory. The capital asset pricing model is still largely accepted by the investment community today however, anomalies have been found in the theory. Stocks with low price/earnings ratios, stocks of companies with relatively low capitalization, and stocks of neglected firms all have been found to have higher returns than would be predicted using the capital asset pricing model. These three types of stocks have also been found to exhibit significantly high returns during the month of January. Arbel and Strebel posit that all four of the anomalies presented in this thesis can be tied to an underlying factor of risk, known as estimation risk, which is not included in the capital asset pricing model. Carvell and Strebel corrected the misspecified capital asset pricing model with the inclusion of estimation risk, to more accurately predict risk and return, thus expanding the ability of modern portfolio theory.

Subject Categories

Business Administration, Management, and Operations


© David G. Heidbrink