Multifactor Portfolio Efficiency and Multifactor Asset Pricing
The concept of multifactor portfolio efficiency plays a role in Merton's intertemporal CAPM (the ICAPM), like that of mean-variance efficiency in the Sharpe-Lintner CAPM. In the CAPM, the relation between the expected return on a security and its risk is just the condition on security weights that holds in any mean-variance-efficient portfolio, applied to the market portfolio <italic>M</italic>. The risk-return relation of the ICAPM is likewise just the application to <italic>M</italic> of the condition on security weights that produces ICAPM multifactor-efficient portfolios. The main testable implication of the CAPM is that equilibrium security prices require that <italic>M</italic> is mean-variance-efficient. The main testable implication of the ICAPM is that securities must be priced so that <italic>M</italic> is multifactor-efficient. As in the CAPM, building the ICAPM on multifactor efficiency exposes its simplicity and allows easy economic insights.
Year of publication: |
1996
|
---|---|
Authors: | Fama, Eugene F. |
Published in: |
Journal of Financial and Quantitative Analysis. - Cambridge University Press. - Vol. 31.1996, 04, p. 441-465
|
Publisher: |
Cambridge University Press |
Description of contents: | Abstract [journals.cambridge.org] |
Saved in:
Saved in favorites
Similar items by person
-
Agency problems and the theory of the firm
Fama, Eugene F., (2009)
-
Organizational forms and investment decisions
Fama, Eugene F., (2009)
-
Fama, Eugene F., (2011)
- More ...