Moreover,E(RM),the expected return on assets whose returns are uncorrelated with RM,is the riskfree rate,Re and(4a)becomes the familiar Sharpe-Lintner CAPM risk-return relation, (5) E(R)=R+[E(R)-R)]BM i=1.....N. In words,the expected return on any asset i is the riskfree interest rate,Rr,plus a risk premium which is the beta risk of asset i in M BiM,times the price per unit of beta risk,E(RM)-R(the market risk premium).And BiM is the covariance risk of i in M,cov(Ri,RM),measured relative to the overall risk of the M,s(RM),which is itself a weighted average of the covariance risks of all assets(see equations(1b) and(2)).Finally,note from(4b)that BiM is also the slope in the regression of Ri on RM.This leads to its commonly accepted interpretation as the sensitivity of the asset's return to variation in the market return. Unrestricted riskfree borrowing and lending is an unrealistic assumption.The CAPM risk-return relation(4a)can hold in its absence,but the cost is high.Unrestricted short sales of risky assets must be allowed.In this case,we get Fischer Black's(1972)version of the CAPM.Specifically,without riskfree borrowing or lending,investors choose efficient portfolios from the risky set(points above b on the abc curve in Figure D).Market clearing requires that when one weights the efficient portfolios chosen by investors by the ir(positive)shares of aggregate invested wealth,the resulting portfolio is the market portfolio M.But when unrestricted short-selling of risky assets is allowed,portfolios of positively weighted efficient portfolios are efficient.Thus,market equilibrium again requires that M is efficient, which means assets must be priced so that(4a)holds. Unfortunately,the efficiency of the market portfolio does require either unrestricted riskfree borrowing and lending or unrestricted short selling of risky assets.If there is no riskfree asset and short- sales of risky assets are not allowed,Markowitz'investors still choose efficient portfolios,but portfolios made up of efficient portfolios are not typically efficient.This means the market portfolio almost surely is not efficient,so the CAPM risk-return relation(4a)does not hold.This does not rule out predictions about the relation between expected return and risk if theory can specify the portfolios that must be efficient if the market is to clear.But so far this has proven impossible 55 Moreover, E(RzM), the expected return on assets whose returns are uncorrelated with RM, is the riskfree rate, Rf , and (4a) becomes the familiar Sharpe-Lintner CAPM risk-return relation, (5) ( ) [ ( ) )] , E R R i = f + - E R R M f biM i=1,…,N. In words, the expected return on any asset i is the riskfree interest rate, Rf , plus a risk premium which is the beta risk of asset i in M, ßiM, times the price per unit of beta risk, E(RM) – Rf (the market risk premium). And ßiM is the covariance risk of i in M, cov(Ri , RM), measured relative to the overall risk of the M, s 2 (RM), which is itself a weighted average of the covariance risks of all assets (see equations (1b) and (2)). Finally, note from (4b) that ßiM is also the slope in the regression of Ri on RM. This leads to its commonly accepted interpretation as the sensitivity of the asset’s return to variation in the market return. Unrestricted riskfree borrowing and lending is an unrealistic assumption. The CAPM risk-return relation (4a) can hold in its absence, but the cost is high. Unrestricted short sales of risky assets must be allowed. In this case, we get Fischer Black’s (1972) version of the CAPM. Specifically, without riskfree borrowing or lending, investors choose efficient portfolios from the risky set (points above b on the abc curve in Figure 1). Market clearing requires that when one weights the efficient portfolios chosen by investors by their (positive) shares of aggregate invested wealth, the resulting portfolio is the market portfolio M. But when unrestricted short-selling of risky assets is allowed, portfolios of positively weighted efficient portfolios are efficient. Thus, market equilibrium again requires that M is efficient, which means assets must be priced so that (4a) holds. Unfortunately, the efficiency of the market portfolio does require either unrestricted riskfree borrowing and lending or unrestricted short selling of risky assets. If there is no riskfree asset and short￾sales of risky assets are not allowed, Markowitz’ investors still choose efficient portfolios, but portfolios made up of efficient portfolios are not typically efficient. This means the market portfolio almost surely is not efficient, so the CAPM risk-return relation (4a) does not hold. This does not rule out predictions about the relation between expected return and risk if theory can specify the portfolios that must be efficient if the market is to clear. But so far this has proven impossible