The Market Model and Capital Asset Pricing Theory: A Note

Authors

  • R. C. STAPLETON,

  • M. G. SUBRAHMANYAM

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    • National Westminster Bank Professor of Business Finance, Manchester Business School, and Professor of Finance, New York University, respectively. We would like to thank the editor, Michael J. Brennan, and the referee, Gordon Sick, for their comments.

ABSTRACT

This note shows that a linear market model is sufficient to derive a linear relationship between beta and expected return. Furthermore, the slope of the relationship will be identical with that of the Capital Asset Pricing Model if the return on the market portfolio is normally distributed. However, results from characterization theory suggest that the linear market model assumption is close to that of multivariate normality.

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