A Robust Capital Asset Pricing Model

15 Pages Posted: 9 Jan 2014

See all articles by Doriana Ruffino

Doriana Ruffino

Board of Governors of the Federal Reserve System

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Date Written: December 17, 2013

Abstract

We build a market equilibrium theory of asset prices under Knightian uncertainty. Adopting the mean-variance decisionmaking model of Maccheroni, Marinacci, and Ruffino (2013a), we derive explicit demands for assets and formulate a robust version of the two-fund separation theorem. Upon market clearing, all investors hold ambiguous assets in the same relative proportions as the assets' market values. The resulting uncertainty-return tradeoff is a robust security market line in which the ambiguous return on an asset is measured by its beta (systematic ambiguity). A simple example on portfolio performance measurement illustrates the importance of writing ambitious, robust asset-pricing models.

Keywords: Model uncertainty, Mean-variance portfolio-selection theory, Two-fund separation theorem, Capital asset pricing model

JEL Classification: D81, G11, G12

Suggested Citation

Ruffino, Doriana, A Robust Capital Asset Pricing Model (December 17, 2013). FEDS Working Paper No. 2014-01, Available at SSRN: https://ssrn.com/abstract=2376371 or http://dx.doi.org/10.2139/ssrn.2376371

Doriana Ruffino (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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