We show that if the intercept and slope of the instantaneous capital market line are deterministic, then investors will not hold any hedge portfolios in the sense of Merton [1973, 1990]. They will choose portfolios that plot on the capital market line, and they will slide up and down the capital...

We show that if the intercept and slope of the instantaneous capital market line are deterministic, then investors will not hold any hedge portfolios in the sense of Merton [1973, 1990]. They will choose portfolios that plot on the capital market line, and they will slide up and down the capital...

This paper studies the concept of instantaneous arbitrage in continuous time and its relation to the instantaneous CAPM. Absence of instantaneous arbitrage is equivalent to the existence of a trading strategy which satisfies the CAPM beta pricing relation in place of the market. Thus the...

This paper proposes modified versions of the Sharpe ratio and Jensen's alpha which are appropriate in a simple continuous-time model. Both are derived from optimal portfolio selection. The modified Sharpe ratio equals the ordinary Sharpe ratio plus half of the volatility of the fund. The...