RISK, RETURN AND EQUILIBRIUM: SOME CLARIFYING COMMENTS

RISK, RETURN AND EQUILIBRIUM: SOME CLARIFYING COMMENTS The Journal oj Finance that investors can make optimal portfolio decisions on the basis of means and standard deviations of distributions of one-period portfolio returns," (b) All investors have the same decision horizon, and over this common horizon period the means and variances of the distributions of one-period returns on assets and portfolios exist. (c) Capital markets are perfect in the sense that all assets are infinitely divisible, there are no transactions costs or taxes, information is costless and available to everybody, and borrowing and lending rates are equal to each other and the same for all investors. (d) Expectations and portfolio opportunities are "homogenous" throughout the market. That is, all investors have the same set of portfolio opportunities, and view the expected returns and standard deviations of return' provided by the various portfolios in the same way. Assumption (a) places the analysis within the framework of the Markowitz [10] one-period mean-standard deviation portfolio model. Tobin [15] shows that the mean-standard deviation framework' is appropriate either when probability distributions of portfolio returns are normal or Gaussian" or when investor utility of return functions are well-approximated by quadratics. In either case the optimal portfolio for a risk averter will http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

RISK, RETURN AND EQUILIBRIUM: SOME CLARIFYING COMMENTS

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Abstract

The Journal oj Finance that investors can make optimal portfolio decisions on the basis of means and standard deviations of distributions of one-period portfolio returns," (b) All investors have the same decision horizon, and over this common horizon period the means and variances of the distributions of one-period returns on assets and portfolios exist. (c) Capital markets are perfect in the sense that all assets are infinitely divisible, there are no transactions costs or taxes, information is costless and available to everybody, and borrowing and lending rates are equal to each other and the same for all investors. (d) Expectations and portfolio opportunities are "homogenous" throughout the market. That is, all investors have the same set of portfolio opportunities, and view the expected returns and standard deviations of return' provided by the various portfolios in the same way. Assumption (a) places the analysis within the framework of the Markowitz [10] one-period mean-standard deviation portfolio model. Tobin [15] shows that the mean-standard deviation framework' is appropriate either when probability distributions of portfolio returns are normal or Gaussian" or when investor utility of return functions are well-approximated by quadratics. In either case the optimal portfolio for a risk averter will

Journal

The Journal of FinanceWiley

Published: Mar 1, 1968

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