Finance, Economics, and Mathematics

Chapter 22The Efficient Market Model

By Oldrich A. Vasicek and John A. McQuown

Financial Analysts Journal, 28 (5) (1972), 71–84 (received Graham and Dodd Award); reprinted in Analyze Financière 15, 21–35, 1973 (in French); reprinted in Supplementary Readings in Financial Analysis, Institute of Chartered Financial Analysts, University of Virginia, 1973.

Introduction and Summary

The purpose of this chapter is to discuss what is known as the “efficient market model of capital market theory,” the most significant part of which is the Capital Asset Pricing Model. The paper does not extend the model. It is a nontechnical summary of the papers by Treynor (1961),¹ Sharpe (1970), Lintner (1965), Black (1972), and others. Their writings require considerable familiarity with mathematical and econometric concepts, hence a more verbal exposition of the basic ideas may be helpful to some readers.

There are two appropriate caveats concerning the context of this chapter. They both follow from the fact that it is an exposition, and not an extension, of the thinking of the authors of capital market theory. The first is that this paper does not expose all of the work by all of these authors. It is not, therefore, a fully comprehensive exposition. In particular, completeness has been sacrificed in the treatment of some of the more advanced extensions and refinements of capital market theory, especially where considerable mathematical sophistication is involved. This incompleteness seems palatable ...