ABSTRACT
A natural point to start discussion about the impact of size on capital market performance is the capital asset pricing model of Sharpe (1964) and Lintner (1965).1 For that model, Lintner (1970) showed that an increase in the size of the market – whether measured by an increase in the number of stockholders or in the wealth of each – results in greater ‘risk tolerance’ of the market as a whole. This is to say that, as the market size increases, the degree of risk aversion of the market as a whole falls, and, accordingly, the price of risk also falls.2 In the limit, as the number of investors goes to infinity, the market acts as if it were risk neutral – that is, the price of risk falls to zero. The reason for this ‘risk elimination’ is the greater ability of investors to diversify the risks held by any one of them and the concomitant decline in the total risk borne by all the stockholders in the market as the number of investors increases. In the limit, the risk borne by each investor falls to zero. The result is analogous to the ‘risk spreading’ proposition in the public sector context of Arrow and Lind (1970).
