Extending the CAPM Framework

In this paper we extend the Capital Asset Pricing Model (CAPM) to include the case where investors allocate a part of their funds in n risky assets while the rest funds are kept as cash that generates no interest. This more general version of the model, which has practical relevance to investments in mutual funds, contains Black's (1972) CAPM as a specific case. The CAPM is derived by using two concepts that relate to the mean-variance framework of Markowitz (1952), that is, the column vector that defines mean-variance efficient (MVE) portfolios and the risk premium of a MVE portfolio relative to its orthogonal MVE portfolio. In our analysis, the cost of the involved portfolios can assume any possible value except zero.