The striking and powerful conclusions of the capital asset pricing model (CAPM) [13,8] arise from imposing the requirement that optimal individual portfolio decisions must be consistent with a market equilibrium for securities. That simple requirement–of market balance–produces the strong results that have been the centerpiece of research in finance in the last fifteen years. But despite the huge payoffs to imposing equilibrium requirements on financial markets, the CAP model remains a partial equilibrium result. The risks which are attributed to securities are strictly exogenous. Securities are risky because their prices fluctuate, but the cause of those price fluctuations is rarely specified. The literature seems to associate “market risk” with the business cycle and individual security risk with either random technological change or demand uncertainty. But whatever attribution is made, such risk remains outside of the model itself. Since the keystone of the CAPM is its important distinction between “real” or nondiversifiable risk and purely financial uncertainty, it is disconcerting to recognize that it is a model in which real quantities do not appear at all.

Looking back over the last two decades, financial economists can find considerable cause for pride and self-congratulation in the development of their discipline. From the earliest steps toward a rigorous theory of capital budgeting, through the Modigliani-Miller theorems on corporate financing and cost of capital, to the development of the capital asset pricing theory, the field of finance has garnered a well-deserved reputation for rigor, analytic sophistication, and pace of intellectual growth.

Major points covered by Paul H. Cootner in his discussion of “The Prediction of Systematic and Specific Risk in Common Stocks” by Barr Rosenberg and Walter McKibben have been incorporated by the authors in the revised version of their paper.

The railroads played an important role in the economic history of the United States. It was an epic role, involving enterprise on a grand scale, evoking heated passions, and rich in anecdote and drama.