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| Author: | Fama, E. F. |
| Title: | Multifactor portfolio efficiency and multifactor asset pricing |
| Journal: | Journal of Financial and Quantitative Analysis
1996 : DEC, VOL. 31:4, p. 441-465 |
| Index terms: | PRICING ASSETS PORTFOLIO INVESTMENT EFFICIENCY |
| Language: | eng |
| Abstract: | The Sharpe-Lintner CAPM starts with assumptions that imply that investors hold mean-variance-efficient (MVE) portfolios. Assumptions are added to guarantee that the market portfolio M is MVE. The risk-return relation of the CAPM is then just the application to M of the condition on security weights that holds in any MVE portfolio. Merton's intertemporal CAPM is similar. ICAPM investors hold multifactor-efficient portfolios that generalize the notion of portfolio efficiency. ICAPM investors dislike wealth uncertainty, like CAPM investors, and they use Markowitz' MVE portfolios to optimize the tradeoff of expected return for general sources of return finance. The typical multifactor-efficient portfolio of the ICAPM combines an MVE portfolio with hedging portfolios that mimic uncertainty about consumption-investment state variables. |
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