bI JOURNAL OF POLITICAL ECONOMY normal (or symmetric stable), then the variables mat, Yot, Y1t, Yet and Yar must have a multivariate normal (or symmetric stable)distribution D. Capital Market Efficiency: The Behavior of Returns through Time C1-C3 are conditions on expected returns and risk that are implied by the two-parameter model. But the model, and especially the underlyin assumption of a perfect market, implies a capital market that is efficient in the sense that prices at every point in time fully refect available informa tion. This use of the word efficient is, of course not to be confused with portfolio efficiency. The terminology, if a bit unfortunate, is at least standard Market efficiency in combination with condition C1 requires that scrutin of the time series of the stochastic nonlinearity coefficient Yet does not lead to nonzero estimates of expected future values of Y2t. Formally, Yet must be a fair game. In practical terms, although nonlinearities are ob- served ex post, because Y2 is a fair game, it is always appropriate for the investor to act ex ante under the presumption that the two-parameter model, as summarized by (6), is valid. That is, in his portfolio decisions he always assumes that there is a linear relationship between the risk of a security and its expected return. Likewise, market efficiency in the two parameter model requires that the non-B risk coefficient 13t and the time series of return disturbances mit are fair games. And the fair-game hypo difference between the risk premium for period t and its expected value o time series o of Yu-[E(Rmt)-E(Rot1,th In the terminology of Fama(1970b), these are "weak-form"proposi tions about capital market efficiency for a market where expected returns are generated by the two-parameter model. The propositions are weak since they are only concerned with whether prices fully reflect any information in the time series of past returns. "Strong-form"tests would be concerned with the speed-of-adjustment of prices to all available information E. Market Equilibrium with Riskless Borrowing and Lending We have as yet presented no hypothesis about for in(7). In the general two-parameter model, given E(Y )=E( r)=E(u)=0, then, from (6), E(Yor)is just E(Ror), the expected return on any zero-B security And market efficiency requires that Yot-E(Ror)be a fair game But if we add to the model as presented thus far the assumption that there is unrestricted riskless borrowing and lending at the known rate R, then one has the market setting of the original two-parameter "capital asset pricing model"of Sharpe(1964)and Lintner(1965 ). In this world, since B,=0, E(You)=Ri. And market efficiency requires that Yot-Rrtbe a fair game