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Equilibrium with divergence of opinion

Edward Miller
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Edward Miller: University of New Orleans

No 1999-17, Working Papers from University of New Orleans, Department of Economics and Finance

Abstract: Because the less informed incorrectly estimate asset returns, they anticipate higher returns from their risky investments. They thus over-invest in risky securities. They are rewarded by higher total portfolio returns. Too high a proportion of less informed investors lowers the return on risky assets. Equilibrium requires that the less informed’s rate of return equal the informed’s. The less informed control a stable equilibrium percentage of total wealth. Because an individual’s recent investment experience correlates with his terminal wealth, learning need not reduce the less informed’s risky asset exposure. Implications exist for the slope of the return versus systematic risk curve.

Keywords: High-risk securities; Investment strategies (search for similar items in EconPapers)
JEL-codes: G12 G11 G34 (search for similar items in EconPapers)
Date: 1999
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