Mayers and Rice conjecture that an investor with better information will on average plot above the security market line as drawn by uninformed investors. This paper demonstrates that this conjecture is false in general, by constructing a counterexample. However, the Mayers-Rice conjecture is really part of a much broader hypothesis concerning whether increases in expected returns correspond to increases in expected utilities. It is shown that this latter hypothesis is true when the investor has an exponential or logarithmic utility function.

This paper models effects of short-sale constraints on the speed of adjustment (to private information) of security prices. Constraints eliminate some informative trades, but do not bias prices upward. Prohibiting traders from shorting reduces the adjustment speed of prices to private information, especially to bad news. Non-prohibitive costs can have the reverse effect, but this is unlikely. Implications are developed about return distributions on information announcement dates. Periods of inactive trade are shown to impart a downward bias to measured returns. An unexpected increase in the short-interest of a stock is shown to be bad news.

This paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset. Each trader conditions his estimate of the return both on his own private source of information and price, which in equilibrium serves as a ‘noisy’ aggregator of the total information observed by all traders. A closed-form characterization of the rational expectations equilibrium is presented. A counter-example to the existence of ‘fully revealing’ equilibrium is developed.