contributions to portfolio analysis have been based on the two parameter (meanvariance) model of portfolio selection. Markowitz's normative theory provides the basis for the positive theory of the valuation of risk assets developed by Sharpe [38] and Lintner [27]. The two parameter capital asset pricing model has been subject to numerous applications including performance measurement, tests of security market efficiency and corporation finance.' Recently, Friend and Blume [15], Black, Jensen and Scholes [5], Miller and Scholes [31], Fama and MacBeth [14], and Blume and Friend [8] have published empirical results which are inconsistent with the traditional form of the SharpeLintner model. These studies suggest that the slope of the capital asset pricing model is lower and the intercept higher than predicted by the traditional theory. Using the Cass-Stiglitz [10] observation that the entire mean variance frontier may be generated by linear combinations of any frontier portfolios, Vasicek [41] and Black [6] show that these empirical results are consistent with capital market equilibrium in the absence of borrowing. Unfortunately, the Vasicek-Black modification results in a weaker positive theory since neither the magnitude of the slope nor the magnitude of the intercept of their capital market model is predicted. Brennan [9] shows that under divergent borrowing and lending rates the modified capital asset pricing model predicts that the intercept is bounded by the borrowing and lending rates and, equivalently, that the slope is bounded by the difference between the market's expected rate of return and the lending rate, and the difference between the market's expected rate of return and the borrowing rate. Although Friend and Blume interpret their empirical results as consistent with a mean variance model under divergent borrowing and lending rates, the Black, Jensen and Scholes' empirical results appear to be inconsistent with the predictions of the Brennan modification since the intercept exceeds the borrowing rate. The present paper extends the capital asset pricing model to incorporate the