The two-fund separation theorem revisited |
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Authors: | Jan Wenzelburger |
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Institution: | 1.Centre for Economic Research,Keele University,Keele,UK |
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Abstract: | This paper resolves two issues regarding the traditional capital asset pricing model with one risk-free asset which seem to
have been overlooked in the literature. First, it provides an elementary and complete proof of the two-fund separation theorem
which accounts for the fact that asset demand may become undefined if the limiting slopes of the investor’s indifference curves
are finite. Second, it shows that an additional limiting condition on investors’ risk aversions is generally necessary to
guarantee existence of an equilibrium. Moreover, a generalized existence result is formulated which includes investors who
in equilibrium may not invest in risky assets and a simple condition ensuring positive equilibrium asset prices is given. |
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Keywords: | |
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