The CAPM and Beta in an Imperfect Market

Abstract:     
The General Capital Asset Pricing Model (GCAPM) incorporates certain market imperfections. Levy concludes that in GCAPM equilibrium, all investors do not necessarily hold the market portfolio and that a security's own variance is priced. We show that financial intermediaries, responding to potential abnormal profits, relax an important GCAPM constraint. The introduction of intermediaries into the GCAPM leads to results not unlike those of the CAPM itself. If an asset's own variance affects its price, we conclude that this feature provides a major reason for the existence of financial intermediaries.

Keywords: Arbitrage, Market Efficiency Hypothesis, GCAPM, CAPM, intermediaries, market portfolio, systematic risk

JEL Classification: G1, G2, D5, E2, M5

Accepted Paper Series