Portfolio Selection and Asset Pricing Models

Journal of Finance, forthcoming.

49 Pages Posted: 13 Feb 2009

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: March 13, 1999

Abstract

Finance theory can be used to form informative prior beliefs in financial decision-making. This paper approaches portfolio selection in a Bayesian framework that incorporates a prior degree of belief in an asset pricing model. Sample evidence on home bias and value and size effects is evaluated from an asset-allocation perspective. U.S. investors' belief in the domestic CAPM must be very strong to justify the home bias observed in their equity holdings. The same strong prior belief results in large and stable optimal positions in the Fama-French book-to-market portfolio in combination with the market since the 1940s.

Keywords: portfolio choice, Bayesian, asset pricing, CAPM

JEL Classification: G12

Suggested Citation

Pastor, Lubos, Portfolio Selection and Asset Pricing Models (March 13, 1999). Journal of Finance, forthcoming. . Available at SSRN: https://ssrn.com/abstract=1342890 or http://dx.doi.org/10.2139/ssrn.1342890

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-4080 (Phone)
773-702-0458 (Fax)

HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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