Portfolio Advice for a Multifactor World
CRSP Working Paper No. 491
21 Pages Posted: 19 Jul 2000
There are 3 versions of this paper
Portfolio Advice for a Multifactor World
Portfolio Advice for a Multifactor World
Portfolio Advice for a Multifactor World
Abstract
Asset returns, it turns out, do not follow the Capital Asset Pricing Model, and are somewhat predictable over time. I survey and interpret the large body of recent work that adapts traditional portfolio theory to answer, what should an investor do about these new facts in finance? I survey the extension of the famous "2 - fund" theorem to an "N-fund" theorem in which investors either hedge or assume the additional, non-market, sources of priced risk; I survey the burgeoning literature on time-varying portfolio rules and the Bayesian literature that advocates a great deal of caution. I emphasize the risk-sharing nature of asset markets, I note the likelihood that many supposed anomalies will not last, and I emphasize the fact that the average investor must hold the market so portfolio decisions must be driven by differences between an investor and the average investor.
JEL Classification: G00
Suggested Citation: Suggested Citation
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