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THE CAPITAL ASSET PRICING MODEL (CAPM), SHORT‐SALE RESTRICTIONS AND RELATED ISSUES

THE CAPITAL ASSET PRICING MODEL (CAPM), SHORT‐SALE RESTRICTIONS AND RELATED ISSUES MARCH 1977 THE CAPITAL ASSET PRICING MODEL (CAPM), SHORT-SALE RESTRICTIONS AND RELATED ISSUES STEPHEN ROSS* A. I. INTRODUCTION THE MEAN VARIANCE CAPITAL asset pricing model (CAPM) developed by Sharpe [5] and Lintner [3] has become a focal point for finance. Under conditions of perfection in competitive markets and assumptions that permit us to consider only the means and variances of returns, the CAPM provides an intuitively appealing and empirically testable hypothesis on asset returns. In deriving the CAPM Sharpe [5] and Lintner [3] assumed that there was a riskless asset in the investment opportunity set, and the first significant extension of their work was by Black [l] who showed that the assumption of a riskless asset could be dispensed with. Black's result naturally raised a number of conjectures concerning what occurs with alternative realistic weakenings of the underlying assumptions. For example, do the conclusions of the CAPM still hold if short sales are restricted or if borrowing is penalized on some assets but not on others? This paper has two objectives. First, a very simple and straightforward approach to the CAPM will be taken. Essentially we will show that all .of the familiar results follow directly from the http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

THE CAPITAL ASSET PRICING MODEL (CAPM), SHORT‐SALE RESTRICTIONS AND RELATED ISSUES

The Journal of Finance , Volume 32 (1) – Mar 1, 1977

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References (5)

Publisher
Wiley
Copyright
1977 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1977.tb03251.x
Publisher site
See Article on Publisher Site

Abstract

MARCH 1977 THE CAPITAL ASSET PRICING MODEL (CAPM), SHORT-SALE RESTRICTIONS AND RELATED ISSUES STEPHEN ROSS* A. I. INTRODUCTION THE MEAN VARIANCE CAPITAL asset pricing model (CAPM) developed by Sharpe [5] and Lintner [3] has become a focal point for finance. Under conditions of perfection in competitive markets and assumptions that permit us to consider only the means and variances of returns, the CAPM provides an intuitively appealing and empirically testable hypothesis on asset returns. In deriving the CAPM Sharpe [5] and Lintner [3] assumed that there was a riskless asset in the investment opportunity set, and the first significant extension of their work was by Black [l] who showed that the assumption of a riskless asset could be dispensed with. Black's result naturally raised a number of conjectures concerning what occurs with alternative realistic weakenings of the underlying assumptions. For example, do the conclusions of the CAPM still hold if short sales are restricted or if borrowing is penalized on some assets but not on others? This paper has two objectives. First, a very simple and straightforward approach to the CAPM will be taken. Essentially we will show that all .of the familiar results follow directly from the

Journal

The Journal of FinanceWiley

Published: Mar 1, 1977

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