The Evolution of Portfolio Rules and the Capital Asset Pricing Model
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Sciubba, E. (2004). The Evolution of Portfolio Rules and the Capital Asset Pricing Model. http://dx.doi.org/10.17863/CAM.5364
The aim of this paper is to test the performance of the standard version of CAPM in an evolutionary framework. We imagine a heterogeneous population of long-lived agents who invest their wealth according to differential porfolio rules and ask what is the fate of those who happen to behave as prescribed by CAPM. In a complete securities market with aggregate uncertainty, it is shown that traders who either believe' in CAPM and use it as a rule of thumb, or are endowed with genuine mean-variance preferences, under some very weak conditions, vanish in the long run. A sufficient condition to drive CAPM or mean-variance traders' wealth shares to zero is shown to be that an investor endowed with a logarithmic utility function enters the market. Finally, the robustness of the results is checked, allowing for different kinds of heterogeneity among traders.
Classification-JEL: C61, D81, G11, Evolution, Portfolio rules, CAPM, Kelly criterion
This record's DOI: http://dx.doi.org/10.17863/CAM.5364