We show in any economy trading options, with investors having mean-variance preferences, that there are arbitrage opportunities resulting from negative prices for out of the money call options. The theoretical implication of this inconsistency is that mean-variance analysis is vacuous. The practical implications of this inconsistency are investigated by developing an option pricing model for a ...

There is no consensus in the literature as to which model should be used to estimate the stock returns and the cost of capital in the emerging markets. The Capital Asset Pricing Model (CAPM) that is most often used for this purpose in the developed markets has a poor empirical record and is likely not to hold in the less developed and less liquid emerging markets. Various factor models have bee...

The existence of mean-variance efficient positive portfolios – portfolios with no negative weights – is a key requirement for equilibrium in the Capital Asset Pricing Model (CAPM). Brennan and Lo (2010) define an “impossible frontier” as a frontier on which all portfolios have at least one negative weight. They prove that for randomly drawn covariance matrices the probability of obtaining an im...

A famous model in nancial theory is the Capital Asset Pricing Model (CAPM). In this paper we propose a two state CAPM in which we assume that excess returns for the market and for a particular security are bivariate normally distributed. The parameters of the distribution are determined by the state of an unobserved stationary Markov chain. Two states represent two business regimes that are cha...

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