A Simple Approach to the Theory of Asset Prices

In this paper we propose a simple, intuitive approach to asset valuation in terms of marginal contributions to the characteristics (moments) of the market portfolio. Considering only the first two moments, mean and variance, the valuation equation corresponds to Sharpe's CAPM. A risk-neutral pricing formula is easily derived, showing the equivalence between CAPM and the Black and Scholes' model. Extensions to higher moments like skewness and kurtosis are straightforward, providing a generalized valuation equation. Finally, the same generalized equation is obtained in a different, more rigorous way, as a result of a classical intertemporal general equilibrium model