Multifactor Portfolio Efficiency and Multifactor Asset Pricing

• Published in: Journal of financial and quantitative analysis Vol. 31; no. 4; pp. 441 - 465
• Main Author: Fama, Eugene F.
• Format: Journal Article
• Language: English
• Published: New York, USA Cambridge University Press 01.12.1996; University of Washington Graduate School of Business Administration
• Subjects: Asset valuation; Business financing; Capital asset pricing models; Capital costs; CAPM; Economic theory; Efficiency; Expected returns; Financial portfolios; Financial securities; Firm theory; Investment risk; Investors; Market portfolios; Portfolio management; Portfolio performance; Quantitative analysis; Rates of return; Risk exposure; Security portfolios; Security prices; Stock returns; Studies; Variance analysis; United States > US
• ISSN: 0022-1090; 1756-6916
• DOI: 10.2307/2331355

The concept of multifactor portfolio efficiency plays a role in Merton's intertemporal CAPM (the ICAPM), like that of mean-variance efficiency in the Sharpe-Lintner CAPM. In the CAPM, the relation between the expected return on a security and its risk is just the condition on security weights that holds in any mean-variance-efficient portfolio, applied to the market portfolio M. The risk-return relation of the ICAPM is likewise just the application to M of the condition on security weights that produces ICAPM multifactor-efficient portfolios. The main testable implication of the CAPM is that equilibrium security prices require that M is mean-variance-efficient. The main testable implication of the ICAPM is that securities must be priced so that M is multifactor-efficient. As in the CAPM, building the ICAPM on multifactor efficiency exposes its simplicity and allows easy economic insights.