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Incomplete Diversification and Asset Pricing

Author

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  • Madan, Dilip B.
  • Milne, Frank
  • Elliott, Robert

Abstract

Investors in equilibrium are modeled as facing investor specific risks across the space of assets.Personalized asset pricing models reflect these risks. Averaging across the pool of investors weobtain a market asset pricing model that reflects market risk exposures. It is observed on invokinga law of large numbers applied to an infinite population of investors, that many personally relevantrisk considerations can be eliminated from the market asset pricing model. Examples illustratingthe effects of undiversified labor income and taste specific price indices are provided. Suggestionsfor future work on asset pricing include a need to focus on identifying and explaining investorspecific risk exposures.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Madan, Dilip B. & Milne, Frank & Elliott, Robert, 1992. "Incomplete Diversification and Asset Pricing," Queen's Economics Department Working Papers 273258, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:273258
    DOI: 10.22004/ag.econ.273258
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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