Abstract
IN TWO recent articles, William F. Sharpe has presented some results of a of a theory of capital asset pricing.' The purpose of this brief paper is to demonstrate that Sharpe's test is, in fact, no at all. Sharpe's theory of capital asset pricing can be summarized as follows: If we assume investors are risk averters with (1) similar expectations about the future performance of financial assets and (2) the ability to borrow and lend funds at a pure (riskless) interest rate, market prices of capital assets will adjust so that the predicted risk of each efficient portfolio's rate of return is linearly related to its predicted expected rate of return.2 Specifically, all efficient portfolios will lie along a line
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