Consumption, Investment, Market Price of Risk, and the Risk-Free Rate

Winston T. Lin and Frank C. Jen

Journal of Financial and Quantitative Analysis, 1980, vol. 15, issue 5, 1025-1040

Abstract: In this paper, we present a new version of the capital asset pricing model CAPM) that provides a linear pricing equation substantially different from that implied by the traditional CAPM of Sharpe [18], Lintner [12], and Mossin [14, 15] (hereafter SLM model). It is assumed that each of the investors has an initial endowment of real resources (say, corn) which can be either consumed invested in investment opportunities available to the investor. A set of simultaneous equations is derived from the model. The set of equations determines the equilibrium values of these interdependent endogenous variables: the amount to be consumed by the investor; the proportion of each investment project be owned by the investor; the amount to be invested in each of the available investment projects; the market value of each project; the market price of risk; and the return imputed by the capital market for a risky project which has a zero-beta risk. If a riskless project exists, the zero-beta rate is just a risk-free rate.

Date: 1980
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