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Journal Article

Mean-Variance Theory in Complete Markets

Philip H. Dybvig and Jonathan E. Ingersoll, Jr.
The Journal of Business
Vol. 55, No. 2 (Apr., 1982), pp. 233-251
Stable URL: http://www.jstor.org/stable/2352701
Page Count: 19
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Mean-Variance Theory in Complete Markets
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Abstract

The complete-markets model of Arrow and Debreu and the mean-variance capital asset pricing model (CAPM) are two paradigms of risky asset markets. This paper provides an integration of these two theories. We prove that the standard mean-variance separation theorem obtains in a complete market only if all investors have quadratic utility. In addition, the familiar CAPM pricing relation can hold for all assets in a complete market only if arbitrage opportunities exist. On the positive side, we show that the validity of this relation for the primary assets in a complete market is unaffected by the distribution of returns on the created financial assets.

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