Portfolio Advice for a Multifactor World

John H. Cochrane ()

No 7170, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Asset returns, it turns out, do not follow the Capital Asset Pricing Model, and are somewhat predictable over time. I survey and interpret the large body of recent work that adapts traditional portfolio theory to answer, what should an investor do about these new facts in finance? I survey the extension of the famous 2 - fund' theorem to an N-fund'' theorem in which investors either hedge or assume the additional, non-market, sources of priced risk; I survey the burgeoning literature on time-varying portfolio rules and the Bayesian literature that advocates a great deal of caution. In a survey, I emphasize the risk-sharing nature of asset markets, I note the likelihood that many supposed anomalies will not last, and I emphasize the fact that the average investor must hold the market so portfolio decisions must be driven by differences between an investor and the average investor.

JEL-codes: G00 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-fin
Date: 1999-06
Note: AP EFG
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Related works:
Working Paper: Portfolio Advice for a Multifactor World (1999)
Journal Article: Portfolio advice of a multifactor world (1999)
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