Undiversifiable Returns in a CAPM Economy

Abstract

The effects of endogenous undiversifiable investment and market structure changes on security pricing are analyzed within the GEI-CAPM (General Equilibrium with Incomplete Markets Capital Asset Pricing Model). Both the mutual fund and security market line theorems are extended conditional to a redefinition of the market portfolio. Relative prices of securities are still determined by covariances with the aggregate endowment but they fail to preserve the ``standard'' invariance result of the CAPM with quadratic utilities. Asset prices may change in response to financial innovation.General Equilibrium with Incomplete Markets; Portfolio Choice; Transfer Technology; Capital Asset Pricing Model