Abstract
The aim of this paper is to test the performance of capital asset pricing model (CAPM) in an evolutionary framework. We model an economy where a heterogeneous population of long-lived agents invest their wealth according to different portfolio rules, and 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.
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Sciubba, E. The evolution of portfolio rules and the capital asset pricing model. Economic Theory 29, 123–150 (2006). https://doi.org/10.1007/s00199-005-0013-2
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DOI: https://doi.org/10.1007/s00199-005-0013-2