The Instantaneous Capital Market Line

Posted: 11 Mar 2006

See all articles by Lars Tyge Nielsen

Lars Tyge Nielsen

Columbia University

Maria Vassalou

Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper


We show that if the intercept and slope of the instantaneous capital market line are deterministic, then investors will not hold any hedge portfolios in the sense of Merton [1973, 1990]. They will choose portfolios that plot on the capital market line, and they will slide up and down the capital market line over time as their wealth and risk tolerance change. This result allows us to aggregate over investors and derive a single factor CAPM where the first and second moments of security returns may change stochastically over time and markets are potentially incomplete.

Keywords: Portfolio optimization, incomplete markets, capital market line, mutual fund separation

JEL Classification: G11, G12

Suggested Citation

Nielsen, Lars Tyge and Vassalou, Maria, The Instantaneous Capital Market Line. Economic Theory, Vol. 28, No. 3, pp. 651-664, August 2006, Available at SSRN:

Lars Tyge Nielsen (Contact Author)

Columbia University

3022 Broadway
New York, NY 10027
United States

Maria Vassalou

Centre for Economic Policy Research (CEPR)

United Kingdom

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