J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, December 1996
Posted: 9 Apr 1997 Last revised: 27 Nov 2015
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: G11, G12
Suggested Citation: Suggested Citation
Fama, Eugene F., Multifactor Portfolio Efficiency and Multifactor Asset Pricing. J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, December 1996. Available at SSRN: https://ssrn.com/abstract=8259