Ravi Bansal
Fuqua School of Business, Duke University, Durham, NC 27708
Bruce Lehmann
University of California, San Diego, CA
Abstract
Two of the pillars of asset pricing theory are mean-variance analysis and the restrictions on state prices implied by the absence of arbitrage. The linear asset pricing models that dominate asset pricing theory follow from the mean-variance efficiency of particular portfolios-the market portfolio for aggregate consumption in the consumption CAPM, and the efficient combination of the factor mimicking portfolios in the Arbitrage Pricing Theory (APT). These asset pricing relations also reflect the absence of riskless arbitrage opportunities-the APT is based explicitly on such restrictions and the marginal conditions in equilibrium models implicitly incorporate them as well since investors prefer more to less.