Existence of Equilibrium and Zero-Beta Pricing Formula in the Capital Asset Pricing Model With Heterogeneous Beliefs

Topics:
Investment and Capital Markets
Tags:
Capital Asset Pricing Model,
Marketing,
Marketing Research,
Peking University,
Pricing,
Pricing Strategy
Source:
Peking University

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Overview: The paper studies a mean-variance capital asset pricing model (CAPM) in which investors have different probability beliefs about assets returns and different attitudes towards risk, all assets are risky, short-selling is allowed and satiation is possible. First, it proves that there exists a competitive equilibrium in the model under a rather general condition. This condition indicates a simple relationship among initial endowment vectors, risk aversion ratio functions, perceived mean vectors and covariance matrices of all investors. Secondly, it derives a zero-beta pricing formula for the model which generalizes the well known Black's zero-beta pricing formula.

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Format: PDF | Size: 231KB | Date: Jun 2003 | Pages: 21

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