Homogeneous expectations assumption(redirected from Maximum Expected Return Criteria)
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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
Homogeneous Expectations Assumption
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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