Multifactor Portfolio Efficiency and Multifactor Asset Pricing

24 Pages Posted: 26 Nov 2015

See all articles by Eugene F. Fama

Eugene F. Fama

University of Chicago - Finance

Multiple version iconThere are 2 versions of this paper

Date Written: November 25, 2015

Abstract

The concept of multifactor portfolio efficiency plays a role in Merton's intertemporal CAPM (the ICAPM), like that of mean-variance efficiency in the Sharpe-Lintner CAPM. In the CAPM, the relation between the expected return on a security and its risk is just the condition on security weights that holds in any mean-variance-efficient portfolio, applied to the market portfolio M. The risk-return relation of the ICAPM is likewise just the application to M of the condition on security weights that produces ICAPM multifactor-efficient portfolios. The main testable implication of the CAPM is that equilibrium security prices require that M is mean-variance-efficient. The main testable implication of the ICAPM is that securities must be priced so that M is multifactor-efficient. As in the CAPM, building the ICAPM on multifactor efficiency exposes its simplicity and allows easy economic insights.

JEL Classification: G12

Suggested Citation

Fama, Eugene F., Multifactor Portfolio Efficiency and Multifactor Asset Pricing (November 25, 2015). Journal of Financial and Quantitative Analysis (JFQA), Vol. 31, No. 4, 1996, Available at SSRN: https://ssrn.com/abstract=2695535

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