A note on the effects of market inefficiency and portfolio constraints on the relationship between the expected return of an asset and the market


  • Thomas A. Severini Northwestern University




A key assumption of the Capital Asset Pricing Model is that the market portfolio is efficient; when it is inefficient, , the difference between the expected excess return of the asset and the value predicted by the CAPM, is non-zero. In this paper, a simple bound on  is given that depends on the efficiency of the market portfolio. Alternatively, the impact of inefficiency may be viewed in terms of its effect on , the coefficient of the expected market return in the CAPM. A simple bound on the difference between , based on an inefficient market portfolio, and , based on an efficient portfolio, is also given. These results are used to assess the impact of portfolio constraints.


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How to Cite

Severini, T. A. (2015). A note on the effects of market inefficiency and portfolio constraints on the relationship between the expected return of an asset and the market. Economics and Business Letters, 4(4), 175–182. https://doi.org/10.17811/ebl.4.4.2015.175-182