The concept of multifactor portfolio efficiency plays a role in Merton
's intertemporal CAPM (the ICAPM), like that of mean-variance efficien
cy in the Sharpe-Lintner CAPM. In the CAPM, the relation between the e
xpected return on a security and its risk is just the condition on sec
urity weights that holds in any mean-variance-efficient portfolio, app
lied to the market portfolio M. The risk-return relation of the ICAPM
is likewise just the application to M of the condition on security wei
ghts that produces ICAPM multifactor-efficient portfolios. The main te
stable implication of the CAPM is that equilibrium security prices req
uire that M is mean-variance-efficient. The main testable implication
of the ICAPM is that securities must be priced so that M is multifacto
r-efficient. As in the CAPM, building the ICAPM on multifactor efficie
ncy exposes its simplicity and allows easy economic insights.