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The Journal of Portfolio Management

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An Asset–Liability Version of the Capital Asset Pricing Model with a Multi-Period Two-Fund Theorem

M. Barton Waring and Duane Whitney
The Journal of Portfolio Management Summer 2009, 35 (4) 111-130; DOI: https://doi.org/10.3905/JPM.2009.35.4.111
M. Barton Waring
is a retired financial economist. He has written many articles addressing strategic asset allocation and investment policy.
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  • For correspondence: barton.waring@aya.yale.edu
Duane Whitney
is a principal at Barclays Global Investors in San Francisco, CA.
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  • For correspondence: duane.whitney@barclaysglobal.com
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Abstract

Despite the simplicity of its strategic asset allocation policy prescription, the original Two-Fund Theorem has never been used by practitioners. The authors present a new capital asset pricing model (CAPM) that incorporates investors’ deferred spending plans, or “economic liabilities”—the underlying purpose behind all investments—and thus reveal a new risk-free asset, the investor’s liability-matching asset portfolio. In combination with a slightly redefined world market portfolio of risky assets, the authors’ model forms a new two-fund theorem that is sensible, practical, and usable. The revised theorem provides an accessible and tractable form of an intertemporal CAPM, bridging the large gap between the simplistic single-period CAPM of Sharpe and others and the difficult, complex intertemporal models of Merton and others.

TOPICS: Portfolio theory, portfolio construction, factor-based models

  • © 2009 Institutional Investor, Inc.
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The Journal of Portfolio Management: 35 (4)
The Journal of Portfolio Management
Vol. 35, Issue 4
Summer 2009
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An Asset–Liability Version of the Capital Asset Pricing Model with a Multi-Period Two-Fund Theorem
M. Barton Waring, Duane Whitney
The Journal of Portfolio Management Jul 2009, 35 (4) 111-130; DOI: 10.3905/JPM.2009.35.4.111

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An Asset–Liability Version of the Capital Asset Pricing Model with a Multi-Period Two-Fund Theorem
M. Barton Waring, Duane Whitney
The Journal of Portfolio Management Jul 2009, 35 (4) 111-130; DOI: 10.3905/JPM.2009.35.4.111
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  • Article
    • Abstract
    • CURRENT METHODS FOR INCORPORATING THE LIABILITY: SURPLUS OPTIMIZATION
    • FIRST, A THREE-FUND THEOREM FOR INVESTORS WITH A LIABILITY
    • THE THREE-FUND THEOREM LEADS TO A NEW VERSION OF THE TWO-FUND THEOREM AND THE CAPM
    • CONCLUSION: IMPLICATIONS OF THE NEW TWO-FUND THEOREM
    • APPENDIX A
    • APPENDIX B
    • ENDNOTES
    • REFERENCES
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