ENDOGENEITY OF EQUILIBRIUM RETURN PARAMETERS AND PORTFOLIO SELECTION Koohyun Park1 Hongik University, Seoul, 121-791, Korea Thomas Rhee California State University, Long Beach, CA 90840-8501, USA The paper presents a numerical procedure to compute various return parameters in portfolio selection models. The approach assumes that joint return parameters in portfolio studies are not exogenous; and are in fact determined within a system of general equilibrium in the capital market. This paper assumes that derivatives exist for every underlying asset. In fact, we derive the equilibrium expected returns, covariance-variance return parameters and even optimal portfolio weights for underlying securities from the value of derivatives. To this end, we invoke the usual no arbitrage argument in the traditional options literature without having to assume a priori about particular securities return distributions, e.g. log-normalities; and hence, the derived return parameters are a simple martingale probability measure of European call option prices. Consequently, we argue that all return parameters are "forward looking." The paper then offers a new meaning to the equilibrium expected returns in the usual Capital Asset Pricing Model (CAPM) when we solve a system of linear equations using this new approach of portfolio selection. 1 This research was conducted while Prof. Park was a visiting scholar in the 2014-15 Academic Year at the College of Business Administration, California State University, Long Beach. 1