Market Equilibrium and the Cost of Capital with Heterogeneous Investment Horizons

Moshe Levy, Haim Levy*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Scopus citations


Expected returns, variances, betas, and alphas are all non-linear functions of the investment horizon. This seems to be a fatal conceptual problem for the capital asset pricing model (CAPM), which assumes a unique common horizon for all investors. We show that under the standard assumptions, the theoretical CAPM equilibrium surprisingly holds with the 1-period parameters, even when investors have heterogeneous and possibly much longer horizons. This is true not only for risk-averse investors, but for any investors with non-decreasing preferences, including prospect theory investors. Thus, the widespread practice of using monthly betas to estimate the cost of capital is theoretically justified.

Original languageAmerican English
Article number44
Issue number3
StatePublished - Mar 2024

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Publisher Copyright:
© 2024 by the authors.


  • capital asset pricing model (CAPM)
  • cost of capital
  • investment horizon
  • prospect theory
  • stochastic dominance


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