Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2008/24: An Arbitrary Benchmark CAPM: One Additional Frontier Portfolio is Sufficient

Steinar Ekern ()
Additional contact information
Steinar Ekern: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway

Abstract: The benchmark CAPM linearly relates the expected returns on an arbitrary asset, an arbitrary benchmark portfolio, and an arbitrary MV frontier portfolio. The benchmark is not required to be on the frontier and may be non-perfectly correlated with the frontier portfolio. The benchmark CAPM extends and generalizes previous CAPM formulations, including the zero beta, two correlated frontier portfolios, riskless augmented frontier, and inefficient portfolio versions. The covariance between the off-frontier benchmark and the frontier portfolio affects the systematic risk of any asset. Each asset has a composite beta, derived from the simple betas of both the asset and the benchmark.

Keywords: Benchmark; CAPM; non-frontier portfolio; zero beta portfolio; composite beta

JEL-codes: G10; G11; G12

18 pages, October 17, 2008

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