Modern Portfolio Theory is pretty mainstream in finance, whereas technical analysis is frowned upon by at least 40% of money managers. Furthermore, all sources I can find claim that MPT (specifically CAPM) are compatible with (actually, founded on) the Efficient Market Hypothesis. How does this make any sense?
The weak EMH states that technical analysis doesn't work because it's impossible to predict future price data from past price data.
Well, here's how the CAPM works:
>Input ((past returns))
>Calculate correlations
>Pick portfolio with maximum amoung of ((past returns)) at minimum possible ((past correlation))
>According to CAPM this portfolio will ((outperform)) all other portfolios in the ((future))
CAPM is technical analysis and cannot work according to EMH. Change my mind.
Every single thing you have in your post only helps mitigating risk, not actualy helping to predict the market.
You been sold into the idea of stay long on the game, so they can milk you more.
Thomas Fisher
No, I know the CAPM doesn't work and I don't use it. This is theoretical.
Reducing risk at constant returns is equivalent to increasing returns (in a perfect capital market). The CAPM claims to be able to select a portfolio that will outperform other portfolios in the future, based only on past price (return) data. I don't understand how this is supposed to be based on EMH which forbids this exact thing.
James Young
Also, I understand that returns aren't necessarily based only on price action, but they could be, and in many cases are, which is enough to violate the EMH.
Jackson Thompson
Do you have an exam on financial market today?
Brandon Carter
If I did, would I be on Jow Forums?
Michael Kelly
Any useful replies?
Gavin Long
CAPM is a basic statistical model. While /biz TA is a bunch of meme lines
William Harris
But fundamentally, they're the same. Both assume that you can increase returns based on past price information.
Charles Long
I mean theoretically sure if you deconstruct it enough then yeah both CAPM and TA are founded on a similar principle - that past data can be used to forecast future returns.
CAPM is a very basic model... at least use F&F three factor. Any analyst worth his salt understands however that the more factors a model has, e.g. the more complex it is, the more it can go wrong during uncommon market conditions.
TA differs in that while the EMH presupposes homo economicus is the only player in the market, TA presents a view of human fallibility. Mr. Market is prone to irrational caprice and you can capitalize on that.
