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Uniqueness of Equilibria in the CAPM

  • Thorsten Hens
  • Beate Pilgrim
Part of the Theory and Decision Library book series (TDLC, volume 33)

Abstract

Nowadays the classical two-period Capital Asset Pricing Model is one of the cornerstones of modern finance. Developed by Sharpe [1964], Lintner [1965], and Mossin [1966], it is widely used both by practitioners and theorists, since it gives us a manageable and attractive way of thinking about risk and required return on a risky investment. Given this successful theory one is forced to ask why the question of uniqueness of equilibria was not intensively investigated for a long time. It should be clear that without uniqueness the CAPM looses much of its relevance: if there are many equilibria, on which can investors base their investment decisions? And what is the “correct” risk premium for risky assets? In this chapter we give a condition for uniqueness of CAPM-equilibria which is based on the risk aversion and the endowments of the investors. Our condition is compatible with non-increasing absolute risk aversion.

Keywords

Utility Function Risk Aversion Market Demand Risk Premium Risky Asset 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer Science+Business Media Dordrecht 2002

Authors and Affiliations

  • Thorsten Hens
    • 1
    • 2
  • Beate Pilgrim
    • 3
  1. 1.University of ZurichSwitzerland
  2. 2.Norwegian Business SchoolNorway
  3. 3.Reuters AGFrankfurtGermany

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