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CAPM in Real World: Risk-Friendly Investments

Author

Listed:
  • Christos Floros

    (Department of Accounting and Finance, Hellenic Mediterranean University, Herakleion, Crete, Greece)

  • Christos Kountzakis

    (Department of Statistics and Actuarial-Financial Mathematics, University of the Aegean, School of Sciences, Karlovassi, 83200 Samos, Greece)

  • Moawia Alghalith

    (Department of Economics, University of the West Indies, St. Augustine, Trinidad)

Abstract

The aim of this paper is to show how the existence of equilibrium in CAPM may be obtained when individuals/investors are risk friendly. This assumption is closer to the real world, since risk aversion is rare and the portfolios implying a greater payoff are the ones which increase the variance of the payoff itself. Specifically, we assume that the wage vectors of the individuals/investors do not lie in the market space, which is the usual assumption for CAPM, namely, the payoff of any portfolio is replicated by the wage of the individuals/investors. The interpretation of such an assumption is that the wealth of the individuals/investors may not invest in financial markets as a whole. The second main result is that the perception of risk by the objective probabilities for the states of the world does not affect the equilibrium existence. This is a consequence of the No-Arbitrage assumption. This condition may be stated in terms of the existence of the objective probabilities for the states of the world. Since CAPM is usually considered as a way to compare the return of the so-called “market portfolio†and the return of any other portfolio, in the final section of this paper, we do provide the regression form of this altered form of CAPM.

Suggested Citation

  • Christos Floros & Christos Kountzakis & Moawia Alghalith, 2024. "CAPM in Real World: Risk-Friendly Investments," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 19(02), pages 1-11, June.
    • Handle: RePEc:wsi:afexxx:v:19:y:2024:i:02:n:s2010495224500088
    DOI: 10.1142/S2010495224500088
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    Keywords

    CAPM; equilibrium in incomplete markets; investment decisions; financial markets;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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