Kandel, ShmuelStambaugh, Robert F2023-05-222023-05-2219952016-06-15https://repository.upenn.edu/handle/20.500.14332/34377The Capital Asset Pricing Model implies that (i) the market portfolio is efficient and (ii) expected returns are linearly related to betas. Many do not view these implications as separate, since either implies the other, but we demonstrate that either can hold nearly perfectly while the other fails grossly. If the index portfolio is inefficient, then the coefficients and from an ordinary least squares regression of expected returns on betas can equal essentially any values and bear no relation to the index portfolio's mean-variance location. That location does determine the outcome of a mean-beta regression fitted by generalized least squares.This is the peer reviewed version of the following article, which has been published in final form at http://dx.doi.org/10.1111/j.1540-6261.1995.tb05170.x. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.FinanceFinance and Financial ManagementArticle