Capital Asset Prices with Heterogeneous Beliefs
We show that in a market with an infinite number of assets and investors with unbiased heterogeneous beliefs, asset prices are identical to pricing in the capital asset pricing model, even if prices reveal no information. This result holds despite the fact that in the heterogeneous market the separation theorem does not hold, and investors hold different portfolios, which are generally located below the capital market line. When the number of assets is finite, prices deviate systematically from the CAPM prices. However, we show via simulations that in a finite but reasonably large market the CAPM pricing and risk-return relationship holds almost perfectly.
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