How is a 5MP sensor not capable of 1080p? A 3MP camera is capable of 1080p.
I'm not an expert on this specific topic and for more in-depth look into this you would have to ask a camera engineer or something.
However camera sensors have limits, if the theory you guys are applying is true it would mean every 8.4MP or above camera sensor can support 4K capture.
It's not that simple and it has something to do with a smooth frame rate and bitrate(Google it).
There are "hidden potentials" of some camera sensors on devices for example people say the Sony sensor used on the iPhone 4S is capable of 4K capture but only in 4:3 and the processor doesn't support it.
The LG G2 was a device with a processor that could handle 4K and a very good camera sensor and someone in the Android community actually managed to get 4k @ 30 FPS on it and 720p @ 120fps, so there are hidden potentials of some camera sensors that OEMs do not use.
But in the 520's case the camera sensor is at best 'okay' and even if the camera sensor supported 1080p it would have a terrible bitrate and it would be in 4:3(16:9 is preferred in video) but leaving all that aside the simple answer is that even if the camera supported it, the processor wouldn't.
RAM has barely anything to do with this and someone asked a Sony representative why the Xperia Z2 had 4K recording and the Xperia Z1 with almost identical and 4k capable hardware did not get 4k and he replied by saying that 3GB RAM is required for 4k, which is a big lie considering that Galaxy S5, OnePlus One and LG G2 have only 2GB.
However I am deviating from the topic here, 512 MB RAM is probably the minimum required for 1080p capture but a more powerful processor and camera sensor is required which the Lumia 520 and 525 do not have, sadly.
But if it is any consolation during my time of owning the Lumia 520 the 720p capture was nothing short of spectacular considering the price of the device and as long as you are not in lowlight conditions it managed to get some pretty worthy footage.
Sorry for such a long answer but I like educating people on this forum.
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