Portfolio Efficiency Under Heterogeneous Beliefs

Xuezhong (Tony) He () and Lei Shi
Additional contact information
Lei Shi: School of Finance and Economics, University of Technology, Sydney, PO Box 123, Broadway NSW 2007, Australia

Chapter 5 in Recent Advances in Financial Engineering 2009, 2010, pp 127-156 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractIn the standard mean variance (MV) capital asset pricing model (CAPM) with homogeneous beliefs, the optimal portfolios of investors are MV efficient. It is expected that this is no longer true in general when investors have heterogeneous beliefs in the means and variances/covariances of asset returns. This paper extends the standard Black's zero-beta CAPM to incorporate heterogeneous beliefs and verifies that the subjectively optimal portfolios of heterogeneous investors are MV inefficient in general. The paper then demonstrates that the traditional geometric relation of the mean variance frontiers with and without the riskless asset under homogeneous beliefs does not hold in general under heterogeneous beliefs. The paper further examines the impact of biased beliefs among investors on the MV efficiency of their optimal portfolios. The results provide some explanations on the risk premium puzzle, Miller's hypothesis, and under-performance of managed funds.

Keywords: Financial Engineering; Mathematical Finance; Credit Risk; Real Options; Optimal Investment; Heterogeneous Beliefs (search for similar items in EconPapers)
Date: 2010
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789814304078_0005 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789814304078_0005 (text/html)
Ebook Access is available upon purchase.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:wschap:9789814304078_0005

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().