Portfolio Advice for a Multifactor World
John Cochrane ()
No 7170, NBER Working Papers from National Bureau of Economic Research, Inc
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
Note: AP EFG
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Published as Economic Perspectives, Federal Reserve Bank of Chicago, Vol. 23, no. 3(1999): 59-78.
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Journal Article: Portfolio advice of a multifactor world (1999)
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