1- Serial correlation - Assuming that the joint distribution of Stocks and bonds is just like flipping a coin.
This is WRONG
2- ALL Modern Finance Assumes Stationary..This is Wrong - Think of pricing houses and stocks at any point in time....Decisions are made on the premise that this condition will last forever..that the market will price it self to this condition. Think about the yield curve and pricing off treasuries. if the 2 yr is always 5% and corporates 200bp above then they will always yield 7%. What do you re balance to? or price off of as conditions change.
3- The crucial mistake in portfolio theory that Samuelson pointed out was that you don't live in Tahiti. There is Nothing to Re balance to>
4- MPT assumes there are no structural Changes - That's Wrong
5- Efficient market theory assumed people were rational. That's Wrong
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