THE LOG-NORMAL ASSET PRICING MODEL (LAPM)

Allon Cohen, Haim Levy*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

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 languageEnglish
Article number0550002
JournalAnnals of Financial Economics
Volume1
Issue number1
DOIs
StatePublished - 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

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