Asset Pricing Through Capital Market Curve

Capital market line plays a key role to determine efficient portfolios with risk-free asset in the domain of asset allocation and portfolio optimization. This line is also called as investment line. Using the characteristics of the capital market line, Sharpe [17] derived the well-known capital asset pricing model (CAPM). This line turns into a nonlinear curve if the measure of risk is changed from the variance to lower partial moment (LPM). In this paper, we study the nature of investment curves and derive an asset pricing equation under the mean-LPM framework. We first prove the convexity of the investment curve in the mean-LPM plane and then, formulating an optimization model, we analytically derive downside capital asset pricing model.