《《Investment Policy Implications of the Capital Asset Pricing Model》.pdf

THE JOURNAL OF FINANCE • VOL. XXXVI, NO. 1 • MARCH 1981 Investment Policy Implication s of th e Capital Asset Pricing Model ROBERT R. GRAUER* ABSTRACT The results of previous generalized Security Market Line (SML) tests of the Mean Variance (MV) and Linear Risk Tolerance (LRT) Capital Asset Pricing Models indicate that the models are empirically identical. A very widely accepted, hut technically incorrect, explanation for the results is that with normal return distrihutions all expected utility maximizing risk-averse investors will pick MV portfolios. The paper shows that the generalized SML tests cannot distinguish between the MV model and a much wider variety of power utility LRT models than has previously heen entertained. On the other hand, with approximately normal, or real world, return distrihutions the investment policies of the various models are shown to be different from each other, and from the MV policy in particular. To the extent the results of the portfolio selection calculations are robust, the results of, and implications drawn from, the tests of the macro pricing relations are not based on firm micro foundations. EMPIRICAL TESTS OF POSITIVE theories of asset pricing have focused primarily on the linear risk return trade-off predicted by the mean variance capital asset pricing model (MV CAPM). The tests (Friend and Blume [9], Black, Jensen, and Scholes [2], Blume and Friend [4], Fama and MacBeth [7]) have provided the model with less than fuU-fledged support. Moreover, from a theoretical view, the model suffers from a number of well-known deficiencies. These two factors have led several authors (Roll [23], Rubinst