Capital Asset Pricing Model Without Borrowing or Short Sales

39 Pages Posted: 14 Dec 2017 Last revised: 7 Jan 2018

Date Written: December 11, 2017


Using a new utility framework, the author constructs a capital asset pricing model (CAPM) without borrowing or short sales. According to the new utility framework, borrowing at the risk-free rate and short sales of the zero-beta portfolio cause a decline in risk tolerance. This rules-out a linear investment frontier. Instead, the frontier is described as an upward-sloping, convex curve that consists of many efficient portfolios. In the absence of short sales, the linear regression between asset returns and asset betas holds only in special cases. Also, the intercept of the regression is unique to each efficient portfolio. Using the proposed model, the author explains empirical violations of traditional CAPMs including the Equity Premium Puzzle and the predictive power of non-beta factors such as market size, P/E and book-to-market ratios.

Keywords: CAPM, Equity Premium Puzzle,Beta Predictive Failures

JEL Classification: G10, G11, G12

Suggested Citation

Popov, Val, Capital Asset Pricing Model Without Borrowing or Short Sales (December 11, 2017). Available at SSRN: or

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