Risk, Return and Equilibrium: Some Clarifying Comments

SHARPE [12] AND LINTNER [7] have recently proposed models directed at the following questions: (a) What is the appropriate measure of the risk of a capital asset? (b) What is the equilibrium relationship between this measure of the asset's risk and its one-period expected return?^ Lintner contends that the measure of risk derived from his model is different and more general than that proposed by Sharpe. In his reply to Lintner, Sharpe [13] agrees that their results are in some ways confiicting and that Lintner's paper supersedes his. This paper will show that in fact there is no confiict between the SharpeLintner models. Properly interpreted they lead to the same measure of the risk of an individual asset and to the same relationship between an asset's risk and its one-period expected return. The apparent conflicts discussed by Sharpe and Lintner are caused by Sharpe's concentration on a special stochastic process for describing returns that is not necessarily implied by his asset pricing model. When applied to the more general stochastic processes that Lintner treats, Sharpe's model leads directly to Lintner's conclusions.