612 JOURNAL OF POLITICAL ECONOMY normal (or symmetric stable),then the variables n,Tot,Yt,and Yat must have a multivariate normal (or symmetric stable)distribution. D.Capital Market Eficiency: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 underlying assumption of a perfect market,implies a capital market that is efficient in the sense that prices at every point in time fully reflect 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 Cl requires that scrutiny of the time series of the stochastic nonlinearity coefficient ya does not lead to nonzero estimates of expected future values of Y2t.Formally, must be a fair game.In practical terms,although nonlinearities are ob- served ex post,becauseis 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 Yat and the time series of return disturbances Ta are fair games.And the fair-game hypo- thesis also applies to the time series of Y-[E(R)-E(Rot)],the difference between the risk premium for period t and its expected value. In the terminology of Fama (19706),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 Yo in (7).In the general two-parameter model,given E()=E()=E(n)=0,then,from (6),E(T)is just E(Rot),the expected return on any zero-B security. And market efficiency requires that Yr-E(Rot)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 Rst, 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 Bs=0,E(Yo)=Rst.And market efficiency requires that Yot-Rrt be a fair game