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Incomplete Diversification and Asset Pricing


  • Robert Elliott

    (University of Calgary)

  • Dilip Madan

    (University of Maryland)

  • Frank Milne

    () (Queen's University)


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 we obtain a market asset pricing model that reflects market risk exposures. It is observed on invoking a law of large numbers applied to an infinite population of investors, that many personally relevant risk considerations can be eliminated from the market asset pricing model. Examples illustrating the effects of undiversified labor income and taste specific price indices are provided. Suggestions for future work on asset pricing include a need to focus on identifying and explaining investor specific risk exposures.

Suggested Citation

  • Robert Elliott & Dilip Madan & Frank Milne, 2002. "Incomplete Diversification and Asset Pricing," Working Papers 1081, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:1081

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    References listed on IDEAS

    1. Connor, Gregory, 1984. "A unified beta pricing theory," Journal of Economic Theory, Elsevier, vol. 34(1), pages 13-31, October.
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    More about this item


    Diversification; Asset Pricing; Investor specific risks;

    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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