CAPITAL ASSET MARKET market. He suggests, however, that his analysis can be reversed and extended to a more general market for risky assets. The present paper may be seen as an attempt in that direction. The general approach is different in important respects, however, particularly as concerns the price concept used. Borch's price implies in our terms that the price of a security should depend only on the stochastic nature of the yield, not on the number of securities outstanding. This may be accounted for by he particular characteristics of a reinsurance market, where such a price concept eems more reasonable than is the case for a security market. A rational person ill not buy securities on their own merits without considering alternative invest- ments. The failure of Borchs model to possess a Pareto optimal solution appears to be due to this price concept Generality has its virtues, but it also means that there will be many questions to which definite answers cannot be given. To obtain definite answers, we must be willing to impose certain restrictive assumptions. This is precisely what our paper ttempts to do, and it is believed that this makes it possible to come a long way towards providing a theory of the market risk premium and filling the gap between demand functions and equilibrium properties Brownlee and Scott specify equilibrium conditions for a security market very similar to those given here, but are otherwise concerned with entirely different problems. The paper by Sharpe gives a verbal-diagrammatical discussion of the determination of asset prices in quasi-dynamic terms. His general description of the character of the market is similar to the one presented here, however, and h main conclusions are certainly consistent with ours. But his lack of precision in the specification of equilibrium conditions leaves parts of his arguments somewhat indefinite. The present paper may be seen as an attempt to clarify and make precise ome o 2. THE EQUILIBRIUM MODEL Our general approach is one of determining conditions for equilibrium ofexchange of the assets. Each individual brings to the market his present holdings of the various assets, and an exchange takes place. We want to know what the prices must be in order to satisfy demand schedules and also fulfill the condition that pply and demand be equal for all assets. To answer this question we must first derive relations describing individual demand. Second, we must incorporate these relations in a system describe I equilibrium. Finally, we want to discuss properties of this equilibrium We shall assume that there is a large number m of individuals labeled i, (i=I 2, .., m). Let us consider the behavior of one individual. He has to select a portfolio of assets, and there are n different assets to choose from, labeled j, (j=1, 2,. n The yield on any asset is assumed to be a random variable whose distribution is known to the individual. moreover, all individuals are assumed to have identic has content downl ued stube to sT oR ems aecondtp23013020-0 AMCAPITAL ASSET MARKET 769 market. He suggests, however, that his analysis can be reversed and extended to a more general market for risky assets. The present paper may be seen as an attempt in that direction. The general approach is different in important respects, however, particularly as concerns the price concept used. Borch's price implies in our terms that the price of a security should depend only on the stochastic nature of the yield, not on the number of securities outstanding. This may be accounted for by the particular characteristics of a reinsurance market, where such a price concept seems more reasonable than is the case for a security market. A rational person will not buy securities on their own nmerits without considering alternative invest￾ments. The failure of Borch's model to possess a Pareto optimal solution appears to be due to this price concept. Generality has its virtues, but it also means that there will be many questions to which definite answers cannot be given. To obtain definite answers, we must be willing to impose certain restrictive assumptions. This is precisely what our paper attempts to do, and it is believed that this makes it possible to come a long way towards providing a theory of the market risk premium and filling the gap between demand functions and equilibrium properties. Brownlee and Scott specify equilibrium conditions for a security market very simnilar to those given here, but are otherwise concerned with entirely different problems. The paper by Sharpe gives a verbal-diagrammatical discussion of the determination of asset prices in quasi-dynamic terms. His general description of the character of the market is similar to the one presented here, however, and his main conclusions are certainly consistent with ours. But his lack of precision in the specification of equilibrium conditions leaves parts of his argulments somewhat indefinite. The present paper may be seen as an attempt to clarify and make precise some of these points. 2. THE EQUILIBRIUM MODEL Our general approach is one of determining conditions for equilibrium of exchange of the assets. Each individual brings to the market his present holdings of the various assets, and an exchange takes place. We want to know wllat the prices must be in order to satisfy demand schedules and also fulfill the condition that supply and demand be equal for all assets. To answer this question we must first derive relations describing individual demand. Second, we must incorporate these relations in a system describing general equilibrium. Finally, we want to discuss properties of this equilibrium. We shall assume that there is a large number m of individuals labeled i, (i= 1, 2, ..., im). Let us consider the behavior of one individual. He has to select a portfolio of assets, and there are n different assets to choose from, labeled j, (j= 1, 2, ..., n). Tne yield on any asset is assumed to be a random variable whose distribution is known to the individual. Moreover, all individuals are assumed to have identical This content downloaded from 202.115.118.13 on Wed, 11 Sep 2013 02:20:50 AM All use subject to JSTOR Terms and Conditions