RISK, THE PRICING OF CAPITAL ASSETS, AND THE EVALUATION OF INVESTMENT PORTFOLIOS *

RISK, THE PRICING OF CAPITAL ASSETS, AND THE EVALUATION OF INVESTMENT PORTFOLIOS * JENSEN The University of Rochester THEMAIN PURPOSE of this study is to develop a model for evaluating the performance of portfolios of risky assets. The model begins from the Sharpe-Lintner theory of capital-asset prices, but allows explicitly for the effects of differential degrees of “risk” on the returns of portfolios-a problem which has never been satisfactorily solved. The Sharpe-Lintner results (originally derived in the context of a singleperiod model under the assumption of identical investof horizons) are extended to a multi-period world. I n this model investors’ horizons may be of different lengths and assets may be traded continuously. I n addition, the Sharpe-Lintner ex ante model is extended to include ex post relationships. The resulting model expresses the expected returns on a security (or portfolio) as a function of its level of systematic risk, the risk-free return, and the actual realized returns (instead of the expected future return) on the “market portfolio” over any holding period. Given these results, a measure of portfolio “performance” (which measures only a manager’s ability to forecast security prices) is defined as the difference between the actual returns on a portfolio in any particular holding period and the expected returns on that http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

RISK, THE PRICING OF CAPITAL ASSETS, AND THE EVALUATION OF INVESTMENT PORTFOLIOS *

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Publisher
Wiley
Copyright
1969 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1969.tb01710.x
Publisher site
See Article on Publisher Site

Abstract

JENSEN The University of Rochester THEMAIN PURPOSE of this study is to develop a model for evaluating the performance of portfolios of risky assets. The model begins from the Sharpe-Lintner theory of capital-asset prices, but allows explicitly for the effects of differential degrees of “risk” on the returns of portfolios-a problem which has never been satisfactorily solved. The Sharpe-Lintner results (originally derived in the context of a singleperiod model under the assumption of identical investof horizons) are extended to a multi-period world. I n this model investors’ horizons may be of different lengths and assets may be traded continuously. I n addition, the Sharpe-Lintner ex ante model is extended to include ex post relationships. The resulting model expresses the expected returns on a security (or portfolio) as a function of its level of systematic risk, the risk-free return, and the actual realized returns (instead of the expected future return) on the “market portfolio” over any holding period. Given these results, a measure of portfolio “performance” (which measures only a manager’s ability to forecast security prices) is defined as the difference between the actual returns on a portfolio in any particular holding period and the expected returns on that

Journal

The Journal of FinanceWiley

Published: Dec 1, 1969

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