The mean-variance capital asset pricing model (CAPM) of Sharpe and Lintner was extended by Brennan [3] to incorporate divergent borrowing and lending rates. He found that in equilibrium the security market line (SML) has the same structure as the SML under the single-rate CAPM of Sharpe and Lintner. That is, the expected return of a security or a portfolio remains linear in its systematic risk, with the intercept replaced by an equivalent risk-free return, which is an average of the divergent borrowing and lending rates weighted by the investors' taste parameters. The equivalent risk-free return is larger than the riskless lending rate and, hence, does not represent an inconsistency with the empirical findings by Friend and Blume [4] and by Black, Jensen and Scholes [1[ that the intercept of empirical SML estimated for the single-rate CAPM is larger than the riskless rate. Moreover, Brennan attempted to show that his construct can be extended to the extreme case where there are no riskless opportunities. The case of no riskless opportunities was of course investigated by Black [2], who generalized the CAPM and SML by inventing the concept of zero-beta port-folio to account for the same empirical problem encountered in the traditional SML tests of CAPM. Since the Sharpe-Lintner single-riskless-rate CAPM implies a perfect loan market, we may view the attempts by Black and Brennan as generalizing the CAPM by incorporating financial restrictions and loan market imperfections. Their primary motive, however, is empirical, i.e., to reconcile the results from the traditional SML tests with their generalized CAPM.

[This paper constructs a life-cycle model of the consumer's allocation process in which the capital market is imperfect and the consumption bundle at each instant includes both durable and nondurable goods. The nondurables are instantaneously consumed at the moment of purchase, while the durable good is accumulated and yields a flow of services over its lifetime. The durable investment is assumed to be irreversible. The consumer's optimal allocation program is shown to vary between the periods of borrowing and lending with each phase defining a different relationship between consumption and the "truncated" permanent income.]

Based on the theory of the pricing of capital assets developed by Sharpe [12], Lintner [9] and Mossin [11], Professor Jensen formulated a return-generating model to measure portfolio performance [5]. In a subsequent paper, Professor Jensen [6] investigated the impact of the investment horizon on the functional form of the model. Lee [8] has proposed a generalized specification of the model to resolve this problem. Alternative estimation methods for testing the linearity of the model in terms of time-series data have also been suggested by Lee. Moreover, the stability of the beta coefficient over time and the impact of the market's condition on both the alpha (or, Jensen's measure of performance [5]) and beta of the model have come under scrutiny in financial research.