Incomplete Diversification And Asset Pricing

Robert Elliott, Dilip B. Madan and Frank Milne
Additional contact information
Robert Elliott: University of Calgary
Dilip B. Madan: University of Maryland

No 1081, Working Paper from Economics Department, Queen's University

Abstract: Investors in equilibrium are modeled as facing investor specific risks across the space of assets.Personalized asset pricing models reflect these risks. Averaging across the pool of investors weobtain a market asset pricing model that reflects market risk exposures. It is observed on invokinga law of large numbers applied to an infinite population of investors, that many personally relevantrisk considerations can be eliminated from the market asset pricing model. Examples illustratingthe effects of undiversified labor income and taste specific price indices are provided. Suggestionsfor future work on asset pricing include a need to focus on identifying and explaining investorspecific risk exposures.

Keywords: Diversification; Asset Pricing; Investor specific risks (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2002-02
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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1081.pdf First version 2002 (application/pdf)

Related works:
Working Paper: Incomplete Diversification and Asset Pricing (1992)
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