Heterogeneity of Investors and Asset Pricing in a Risk-Value World



Risk


Fig.l The risk-value efficient frontier depicts the minimal portfolio risk as a func-
tion of the required expected portfolio return
R*. The thin curve represents
the frontier for an endogenous benchmark, the thick curve for an exogenous
benchmark.

3.2 Risk-Value Models With an Exogenous Benchmark

Now consider risk functions with an exogenous benchmark e; e ≥0. Then in

the first order condition (8) for a risk-value efficient portfolio the second term

disappears since portfolio choice has no effect on the benchmark. Hence the
first order condition reads:

-f (⅛) = ηπ, + A; Vε.

(l2)


Again, A > 0 so that η < 0 follows.

Taking expectations yields

-E [f (e)] = η + A                        (l3)

so that subtraction of (l2) from (l3) leads to

-E[f (e)] + f (eε) = ηθε; V ε.                     (l4)

l5



More intriguing information

1. Lumpy Investment, Sectoral Propagation, and Business Cycles
2. The name is absent
3. Handling the measurement error problem by means of panel data: Moment methods applied on firm data
4. An Interview with Thomas J. Sargent
5. The name is absent
6. A MARKOVIAN APPROXIMATED SOLUTION TO A PORTFOLIO MANAGEMENT PROBLEM
7. The name is absent
8. Passing the burden: corporate tax incidence in open economies
9. Foreign direct investment in the Indian telecommunications sector
10. Applications of Evolutionary Economic Geography