A Concave Security Market Line
Type
working paper
Date Issued
2012
Author(s)
Abstract
We provide theoretical and empirical arguments in favor of a concave shape for the security market line, or a diminishing marginal premium for market risk. In capital market equilibrium with binding portfolio restrictions, different investors generally hold different sets of risky securities. Despite the differences in composition, the optimal portfolios generally share a joint exposure to systematic risk. Equilibrium in this case can be approximated by a concave relation between expected return and market beta rather than the traditional linear relation. An empirical analysis of U.S. stock market data confirms the existence of a significant and robust, concave cross-sectional relation between average return and estimated past market beta. We estimate that the market-risk premium is at least five to six percent per annum for the average stock, substantially higher than conventional estimates.
Language
English
Keywords
capital market equilibrium
asset pricing
investment restrictions
portfolio theory
HSG Classification
contribution to scientific community
Refereed
No
Publisher
http://ssrn.com/abstract=1800229
Subject(s)
Eprints ID
209125