2002 | OriginalPaper | Buchkapitel
Incomplete Diversification and Asset Pricing
verfasst von : Dilip B. Madan, Frank Milne, Robert J. Elliott
Erschienen in: Advances in Finance and Stochastics
Verlag: Springer Berlin Heidelberg
Enthalten in: Professional Book Archive
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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.