“Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk”, Journal of Finance by Sharpe William F.
This
study focuses on Capital asset price and the theory of equilibrium under the
condition of risk. Research has shown that one of the problems which has
plagued those attempting to predict the behavior of capital markets is the
absence of a body of positive micro-economic theory dealing with conditions of
risk.
Although many useful insights can be obtained from the traditional models of investment under conditions of certainty, the pervasive influence of risk in financial trans-actions has forced those working in this area to adopt models of price behavior which are little more than assertions. A typical classroom ex-planation of the determination of capital asset prices, for example, usually begins with a careful and relatively rigorous description of the process through which individual preferences and physical relationships interact to determine an equilibrium pure interest rate. This is generally followed by the assertion that somehow a market risk-premium is also determined, with the prices of assets adjusting accordingly to account for differences in their risk. The objective of this study is to examine the implications for the relationship between the prices of individual capital assets and the various components of risk. Also to examine the impact of equilibrium under the condition of risk and how some of the risk inherent in an asset can be avoided so that it’s total risk will obviously not be relevant to influence on its price.
Although many useful insights can be obtained from the traditional models of investment under conditions of certainty, the pervasive influence of risk in financial trans-actions has forced those working in this area to adopt models of price behavior which are little more than assertions. A typical classroom ex-planation of the determination of capital asset prices, for example, usually begins with a careful and relatively rigorous description of the process through which individual preferences and physical relationships interact to determine an equilibrium pure interest rate. This is generally followed by the assertion that somehow a market risk-premium is also determined, with the prices of assets adjusting accordingly to account for differences in their risk. The objective of this study is to examine the implications for the relationship between the prices of individual capital assets and the various components of risk. Also to examine the impact of equilibrium under the condition of risk and how some of the risk inherent in an asset can be avoided so that it’s total risk will obviously not be relevant to influence on its price.
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