Equilibrium with divergence of opinion
AbstractBecause 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.
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Bibliographic InfoPaper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number 1999-17.
Length: 29 pages
Date of creation: 1999
Date of revision:
High-risk securities; Investment strategies;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
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