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Robustness of the market model

Author: Nielsen, Lars Tyge INSEAD Area: FinanceIn: Economic Theory, vol. 3, 1993 Language: EnglishDescription: p. 365-369.Type of document: INSEAD ArticleNote: Please ask the Library for this articleAbstract: The market model specifies that the random vector of returns on risky assets is an affine function of the return on the market portfolio plus a residual which has zero conditional expectation given the return on the market. The model is important because of its intimate relation to distributional two-fund separation and the CAPM equation. This paper shows that the market model is robust to small changes in the asset supplies only if the distribution of returns is spherically generated
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The market model specifies that the random vector of returns on risky assets is an affine function of the return on the market portfolio plus a residual which has zero conditional expectation given the return on the market. The model is important because of its intimate relation to distributional two-fund separation and the CAPM equation. This paper shows that the market model is robust to small changes in the asset supplies only if the distribution of returns is spherically generated

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