C/F/97. The link between the Efficient Market Hypothesis and the Markowitz model

This essay highlights the links between the Efficient Market Hypothesis and the Markowitz model for portfolio selection. The author shows that these two brilliant theoretical concepts are both based on the assumption of the investors rationality. This leads to the close connections between the two models. It is thoroughly described in the text how investors should behave if they follow theoretical models. On the other hand, the author of this essay shows that investors often deviate from rational behaviour, the feature which gave rise to the new branch of science called behavioural finance. Overall, it is shown in the paper that despite all flaws of both models they are still remaining Ótwin pillarsÔ of finance theory since no better conceptions were invented.