All of the preceding chapters have been concerned with how an individual or institution, acting on a set of estimates, could select an optimum portfolio, or set of portfolios. If investors act as we have prescribed, then we should be able to draw on the analysis to determine how the aggregate of investors will behave and how prices and returns at which markets will clear are set. The construction of general equilibrium models will allow us to determine the relevant measure of risk for any asset and the relationship between expected return and risk for any asset when markets are in equilibrium. Furthermore, though the equilibrium models are derived from models of how portfolios should be constructed, the models themselves have major implications for the characteristics of optimum portfolios.

The subject of equilibrium models is so important that we have devoted four chapters to it. In this chapter we develop the simplest form of an equilibrium model, called the *standard capital asset pricing model* (CAPM), or the *one-factor capital asset pricing model*. This was the first general equilibrium model developed, and it is based on the most stringent set of assumptions. The next chapter, on general equilibrium models, deals with models that have been developed under more realistic sets of assumptions. The third chapter in this sequence deals with tests of general equilibrium models. The final chapter deals with a new theory of asset pricing: ...

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