Portfolio Selection and Asset Pricing Models
AbstractFinance theory can be used to form informative prior beliefs in financial decision making. This paper approaches portfolio selection in a Bayesian framework that incorporates a prior degree of belief in an asset pricing model. Sample evidence on home bias and value and size effects is evaluated from an asset-allocation perspective. U.S. investors' belief in the domestic CAPM must be very strong to justify the home bias observed in their equity holdings. The same strong prior belief results in large and stable optimal positions in the Fama-French book-to-market portfolio in combination with the market since the 1940s. Copyright The American Finance Association 2000.
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Bibliographic InfoArticle provided by American Finance Association in its journal The Journal of Finance.
Volume (Year): 55 (2000)
Issue (Month): 1 (02)
Other versions of this item:
- Lubo Pástor, . "Portfolio Selection and Asset Pricing Models," CRSP working papers 356, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Lubo Pástor, . "Portfolio Selection and Asset Pricing Models," CRSP working papers 498, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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