The Evolution of Portfolio Rules and the Capital Asset Pricing Model
36 Pages Posted: 17 Mar 2002
The aim of this paper is to test the performance of the standard version of CAPM in an evolutionary framework. We imagine a heterogeneous population of long-lived agents who invest their wealth according to different portfolio rules and we ask what is the fate of those who happen to behave as prescribed by CAPM. In a complete securities' market with aggregate uncertainty, we prove that traders who either "believe" in CAPM and use it as a rule of thumb, or are endowed with genuine mean-variance preferences, under some very weak conditions, vanish in the long run. We show that a sufficient condition to drive CAPM or mean variance traders' wealth shares to zero is that an investor endowed with a logarithmic utility function enters the market. We finally check the robustness of our results allowing for different kinds of heterogeneity among traders.
Keywords: Evolution, portfolio rules, CAPM, Kelly criterion
JEL Classification: C61, D81, G11
Suggested Citation: Suggested Citation