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General Equilibrium and Capital Assets Pricing

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Bazarnik G., Malawski A.
Argumenta Oeconomica Cracoviensia
|
2011
|
issue 7
7-23
EN
This paper shows that traditional mean-variance portfolio choice, which is a fundamental CAPM assumption, oversimplifies the theory and neglects the relationship between real and security markets. This could also be the primary reason for why the model is so hard to prove using empirical tests. However, the von Neumann-Morgenstern quadratic utility function makes it possible to derive the CAPM from equilibrium in real markets. This is explored in the paper using a two-period finance economy model.
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