Short Sales

As first formally shown by Lintner [1971], the existence of a restriction on short sales is important for the Sharpe-Lintner CAPM. In equilibrium all investors hold the market portfolio, the non-negativity constraint is not binding and the same relationship between expected returns holds. However, the assumption is critical for models such as Black's zero-β CAPM, which involve more than a single portfolio of risky securities.