The Capital Asset Pricing Model

Abstract

While financial economists were testing the EMH (as in Chapter 6), the idea was proposed that the original Markowitz (1952a) work on portfolio analysis could be used as a foundation for an overall theory of how assets are priced in the capital markets. During the 1960s, Treynor (1961), Sharpe (1964), Lintner (1965), and Mossin (1966) proposed economic models that purported to demonstrate how financial markets operate. This early work became known as the Capital Asset Pricing Model, or CAPM…