Assumes standard deviation is the correct
measure of risk with normal distributions.
Ignores investor constraints.
Inputs for risk and correlation between assets rely on historical data. Further, correlations
rise in a financial crisis, so less risk diversified away than indicated by the model.
Ignores transaction costs and investors may not be willing
to change portfolios as often as the model suggests.
Assumes portfolio in each asset class are index
funds with same characteristics as input data.