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Portfolio Advice for a Multifactor World

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  • JOHN H. COCHRANE

Abstract

Asset returns, it turns out, do not follow the Capital Asset Pricing Model, and are somewhat predictable over time. I survey and interpret the large body of recent work that adapts traditional portfolio theory to answer, what should an investor do about these new facts in finance? I survey the extension of the famous 2 - fund' theorem to an N-fund'' theorem in which investors either hedge or assume the additional, non-market, sources of priced risk; I survey the burgeoning literature on time-varying portfolio rules and the Bayesian literature that advocates a great deal of caution. In a survey, I emphasize the risk-sharing nature of asset markets, I note the likelihood that many supposed anomalies will not last, and I emphasize the fact that the average investor must hold the market so portfolio decisions must be driven by differences between an investor and the average investor.
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Suggested Citation

  • John H. Cochrane, 1999. "Portfolio Advice for a Multifactor World," CRSP working papers 491, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    • Handle: RePEc:wop:chispw:491
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    File URL: http://www-gsb.uchicago.edu/fac/john.cochrane/research/Papers/advice4.pdf
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    JEL classification:

    • G00 - Financial Economics - - General - - - General

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