The Theory of Capital Asset Pricing

Abstract

A respectable theory which accounts for investor behaviour needs to start from a statement of investor objectives. The objective may be generally stated as the maximisation of utility (von Neumann & Morgenstern 1953), though of itself utility is difficult to measure. In order to operationalise the theory utility may be broken down into more readily measurable elements, risk and return. From an investor's point of view, it also becomes necessary to specify a scale whereon various combinations of risk and return may be compared. This latter exercise is a very personal one; indeed it may be unique to each investor. It is beyond the scope of this paper to follow this line of argument. Instead we shall concentrate on describing the measurement of risk and return, in particular by using the Capital Asset Pricing Model (CAPM). We recognise, however, that in using this model, we are simplifying the investment behaviour process, in particular we posit the choice of portfolios to be based on single period return/risk with investors having identical estimates (subjective) of these returns.

Citation

Parkinson, J.M. (1982), "The Theory of Capital Asset Pricing", Managerial Finance, Vol. 8 No. 2, pp. 1-5. https://doi.org/10.1108/eb013500