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A Note on the Two-fund Separation Theorem

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Author Info
Wenzelburger, Jan

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Abstract

This note contains two remarks on the traditional capital asset pricing model (CAPM) with one risk-free asset. Firstly, an elementary proof of the two-fund separation theorem is provided showing that asset-demand may become undefined if the limiting slope of the investor's indifference curves is finite. Secondly, it is shown that an additional limiting condition on the risk aversion is generally necessary to guarantee existence of an equilibrium in the CAPM with one risk-free asset. The role of these two limiting conditions seems to have been overlooked in the established literature. A generalized existence result is formulated which allows for the case in which in equilibrium not all investors participate in the market for risky assets.

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File URL: http://mpra.ub.uni-muenchen.de/11014/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11014.

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Date of creation: 08 Feb 2008
Date of revision: 31 Sep 2008
Handle: RePEc:pra:mprapa:11014

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Related research
Keywords: Portfolio choice; CAPM; risk aversion; equilibrium; market participation;

Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium

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References listed on IDEAS
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  1. Ulrich Horst & Jan Wenzelburger, 2008. "On non-ergodic asset prices," Economic Theory, Springer, vol. 34(2), pages 207-234, February. [Downloadable!] (restricted)
  2. Dana, Rose-Anne, 1999. "Existence, uniqueness and determinacy of equilibrium in C.A.P.M. with a riskless asset," Journal of Mathematical Economics, Elsevier, vol. 32(2), pages 167-175, October. [Downloadable!] (restricted)
  3. Lajeri, Fatma & Nielsen, Lars Tyge, 1997. "Parametric Characterizations of Risk Aversion and Prudence," CEPR Discussion Papers 1650, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Hens, Thorsten & Laitenberger, Jorg & Loffler, Andreas, 2002. "Two remarks on the uniqueness of equilibria in the CAPM," Journal of Mathematical Economics, Elsevier, vol. 37(2), pages 123-132, April. [Downloadable!] (restricted)
  5. Volker Bohm & Carl Chiarella, 2000. "Mean Variance Preferences, Expectations Formation, and the Dynamics of Random Asset Prices," Research Paper Series 46, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
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  6. Nielsen, Lars Tyge, 1990. "Existence of equilibrium in CAPM," Journal of Economic Theory, Elsevier, vol. 52(1), pages 223-231, October. [Downloadable!] (restricted)
  7. Nielsen, Lars Tyge, 1987. " Portfolio Selection in the Mean-Variance Model: A Note," Journal of Finance, American Finance Association, vol. 42(5), pages 1371-76, December. [Downloadable!] (restricted)
  8. Nielsen, Lars Tyge, 1990. "Equilibrium in CAPM without a Riskless Asset," Review of Economic Studies, Blackwell Publishing, vol. 57(2), pages 315-24, April. [Downloadable!] (restricted)
  9. Nielsen, Lars Tyge, 1988. "Uniqueness of Equilibrium in the Classical Capital Asset Pricing Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(03), pages 329-336, September. [Downloadable!]
  10. Merton, Robert C., 1972. "An Analytic Derivation of the Efficient Portfolio Frontier," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(04), pages 1851-1872, September. [Downloadable!]
  11. Bohm, Volker & Wenzelburger, Jan, 2005. "On the performance of efficient portfolios," Journal of Economic Dynamics and Control, Elsevier, vol. 29(4), pages 721-740, April. [Downloadable!] (restricted)
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  12. Dana, Rose Anne, 1993. "Existence and Uniqueness of Equilibria When Preferences Are Additively Separable," Econometrica, Econometric Society, vol. 61(4), pages 953-57, July. [Downloadable!] (restricted)
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