The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Capital Asset Pricing Compatible with Observed Market Value Weights
Published: 03/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb04938.x
MICHAEL J. BEST, ROBERT R. GRAUER
We show that the set of expected return vectors, for which an observed portfolio is mean variance (MV) efficient, is a two‐parameter family. We identify ten ways to specify the time series behavior of the two parameters; the result highlights a number of inconsistencies involved in MV modelling. For each of the cases, it permits the inference of the time series of expected return vectors, as well as all the other Capital Asset Pricing Model (CAPM) variables, compatible with a known covariance matrix and the observed time series of market value weights. The empirical work shows that there are substantial case‐to‐case differences in the time series of mean vectors and many of them are quite different from the constant mean vector envisioned in tests of the CAPM.