610 JOURNAL OF POLITICAL ECONOMY E(R)=[E(Rm)一Smo(Rm】十Smo(Rm)B, (2) where cov(Ri,R) XjmGij =1 cov(r,哀m)/o(n) (3) 2(Rm） a2(Rm) o(Rm) The parameter B.can be interpreted as the risk of asset i in the portfolio m,measured relative to (R),the total risk of m.The intercept in (2), E()=E(m)一SmG(m), (4) is the expected return on a security whose return is uncorrelated with R-that is,a zero-B security.Since B=0 implies that a security con- tributes nothing to (Rm),it is appropriate to say that it is riskless in this portfolio.It is well to note from (3),however,that since xim oi=xam o2(R)is just one of the N terms in Bi,B=0 does not imply that security i has zero variance of return. From (4),it follows that Sm= E(R)一E(Ro) a(Rm) (5) so that (2)can be rewritten E(R)=E()+[E(Rm)-E()]B: (6) In words,the expected return on security i is E(R),the expected return on a security that is riskless in the portfolio m,plus a risk premium that is B:times the difference between E(R)and E(Ro). Equation (6)has three testable implications:(C1)The relationship between the expected return on a security and its risk in any efficient port- folio m is linear.(C2)B;is a complete measure of the risk of security i in the efficient portfolio m:no other measure of the risk of i appears in (6). (C3)In a market of risk-averse investors,higher risk should be associated with higher expected return:that is,E(R)-E(R)>0. The importance of condition C3 is obvious.The importance of C1 and C2 should become clear as the discussion proceeds.At this point suffice it to say that if C1 and C2 do not hold,market returns do not reflect the attempts of investors to hold efficient portfolios:Some assets are syste- matically underpriced or overpriced relative to what is implied by the expected return-risk or efficiency equation (6). B.Market Equilibrium and the Efficiency of the Market Portjolio To test conditions C1-C3 we must identify some efficient portfolio m. This in turn requires specification of the characteristic of market equi-