Abstract
A RECENT ARTICLE in this Journal' explored the conditions for equilibrium in the market for capital assets under the assumptions that investors are riskaverters, have similar (probabilistic) beliefs about the future performance of various assets, and can borrow or lend funds at a common (pure) interest rate. Briefly, the article showed that under such conditions 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. Letting vi stand for the standard deviation of the subjective probability distribution of the rate of return on an efficient portfolio, and E1 for the expected value of the distribution, the prices of capital assets will adjust until all efficient portfolios conform to the relationship
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