Abstract
We derive a discrete Log-Normal Asset Pricing Model (LAPM) based on log-normal distributed risky asset returns. Providing an analytical description of the efficient frontier in E(Log(R))-STD(Log(R)) space, we than show that under the log-normality of returns' assumption a segmented market equilibrium is created. The LAPM overcomes some of the drawbacks of the CAPM, hence better conforms with empirical observation; it shows how different portfolios of risky assets may be optimal for different investors; it shows why optimal portfolios may contain only a small number of risky assets, as well as why even with homogeneous expectations optimal portfolios for some investors may include risky assets held in short positions.
Original language | English |
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Article number | 0550002 |
Journal | Annals of Financial Economics |
Volume | 1 |
Issue number | 1 |
DOIs | |
State | Published - 1 Jun 2005 |
Bibliographical note
Publisher Copyright:© 2005 World Scientific Publishing Company.
Keywords
- asset returns
- efficient frontier
- Log-normal asset pricing model
- mean-variance criterion
- optimal portfolios
- utility