434 The Journal of Finance to agree on the prospects of various investments-the expected values standard deviations and correlation coefficients described in Part II. Needless to say,these are highly restrictive and undoubtedly unrealistic assumptions.However,since the proper test of a theory is not the realism of its assumptions but the acceptability of its implications,and since these assumptions imply equilibrium conditions which form a major part of classical financial doctrine,it is far from clear that this formulation should be rejected-especially in view of the dearth of alternative models leading to similar results. Under these assumptions,given some set of capital asset prices,each investor will view his alternatives in the same manner.For one set of prices the alternatives might appear as shown in Figure 5.In this situa- OR Cl C2 CL 1 B4 M FIGURE 5 tion,an investor with the preferences indicated by indifference curves A through As would seek to lend some of his funds at the pure interest rate and to invest the remainder in the combination of assets shown by point since this would give him the preferred over-all position A*.An investor with the preferences indicated by curves Bi through B would seek to in- vest all his funds in combination while an investor with indifference curves Ci through Cs would invest all his funds plus additional (borrowed) This content downloaded from 202.120.21.61 on Mon,06 Nov 2017 02:56:13 UTC All use subject to http://about.istor.org/terms434 The Journal of Finance to agree on the prospects of various investments-the expected values, standard deviations and correlation coefficients described in Part II. Needless to say, these are highly restrictive and undoubtedly unrealistic assumptions. However, since the proper test of a theory is not the realism of its assumptions but the acceptability of its implications, and since these assumptions imply equilibrium conditions which form a major part of classical financial doctrine, it is far from clear that this formulation should be rejected-especially in view of the dearth of alternative models leading to similar results. Under these assumptions, given some set of capital asset prices, each investor will view his alternatives in the same manner. For one set of prices the alternatives might appear as shown in Figure 5. In this situa- aR Cl C2 - -C3 C1/ / B ~~ B~2 1/ / A3 P ER FIGURE 5 tion an investor with the preferences indicated by indifference curves A1 through A4 would seek to lend some of his funds at the pure interest rate and to invest the remainder in the combination of assets shown by point 4,0 since this would give him the preferred over-all position A*. An investor with the preferences indicated by curves B1 through B4 would seek to in- vest all his funds in combination 4, while an investor with indifference curves C1 through C4 would invest all his funds plus additional (borrowed) This content downloaded from 202.120.21.61 on Mon, 06 Nov 2017 02:56:13 UTC All use subject to http://about.jstor.org/terms