Homogeneous Expectations Assumption

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Homogeneous expectations assumption

An assumption of Markowitz portfolio construction that investors have the same expectations with respect to the inputs that are used to derive efficient portfolios: asset returns, variances, and covariances.

In Markowitz Portfolio Theory, the assumption that, under a given set of circumstances, all investors will want the same thing. Specifically, when presented with plans having different returns at a given risk, an investor will choose the plan with the highest return. Likewise, when presented plans with different risks at a given return, the investor will pick the plan with the lowest risk. While few researchers believe the assumption holds entirely true, many defend it as holding "approximately" in a given situation. Developed in the 1950s and 1960s, the homogenous expectations assumption is important to capital asset pricing models.

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