Economic Theory

, Volume 28, Issue 3, pp 651–664 | Cite as

The instantaneous capital market line

  • Lars Tyge NielsenEmail author
  • Maria Vassalou
Research Article


We show that if the intercept and slope of the instantaneous capital market line are deterministic, then investors will not hold any hedge portfolios in the sense of Merton [9, 11]. They will choose portfolios that plot on the capital market line, and they will slide up and down the capital market line over time as their wealth and risk tolerance change. This result allows us to aggregate over investors and derive a single factor CAPM where the first and second moments of security returns may change stochastically over time and markets are potentially incomplete.

Keywords and Phrases:

Portfolio optimization Incomplete markets Capital market line Mutual fund separation. 


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Copyright information

© Springer-Verlag Berlin/Heidelberg 2006

Authors and Affiliations

  1. 1.Oak Hill Platinum PartnersRye BrookUSA
  2. 2.Columbia UniversityGraduate School of BusinessNew YorkUSA

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