The Evolution of Portfolio Rules and the Capital Asset Pricing Model

36 Pages Posted: 17 Mar 2002

See all articles by Emanuela Sciubba

Emanuela Sciubba

University of London - Birkbeck College

Abstract

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

Sciubba, Emanuela, The Evolution of Portfolio Rules and the Capital Asset Pricing Model. Available at SSRN: https://ssrn.com/abstract=302404 or http://dx.doi.org/10.2139/ssrn.302404

Emanuela Sciubba (Contact Author)

University of London - Birkbeck College ( email )

Malet Street
London, WC1E 7HX
United Kingdom

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