17-Capital Asset Pricing Model Page 527 Wednesday, February 4, 2004 1:10 PM
Capital Asset Pricing Model 527variance optimization, then the total investable portfolio, called the
market portfolio, is mean-variance efficient.
■ From the mean-variance efficiency of the market portfolio, Sharpe,
Lintner, Treynor, and Mossin were able to derive the fundamental lin-
ear relationship between the expected value of each security and that of
the market portfolio.
■ In the CAPM, risk is decomposed into diversifiable risk and systematic
or market risk; it is only systematic risk for which an investor should
be compensated.
■ CAPM has been extensively tested using regression-based procedures.
■ The fundamental linearity of risk-return relationship seems to be con-
firmed; however, it seems likely that more than one factor is needed to
explain returns.
■ The empirical testability of CAPM has been questioned given that the
market portfolio cannot be empirically identified.
■ CAPM has had a lasting influence on finance theory and on the prac-
tice of asset management.