Equilibrium in CAPM with Heterogeneous Beliefs

Ning Sun
sun@akita-pu.ac.jp
Faculty of System Science and Technology
Akita Prefectural University

Zaifu Yang
zyang@business.ynu.ac.jp
Faculty of Business Administration
Yokohama National University
Japan

Abstract

We introduce a mean-variance capital asset pricing model (CAPM) in which investors have different probability beliefs about asset returns and different attitudes towards risk, all assets are risky, short-selling is allowed and satiation is possible. It is shown that there exists at least one competitive equilibrium in the model under a rather mild condition.This basic condition indicates a simple relationship among initial endowment vectors, risk aversion ratio functions, perceived mean vectors and covariance matrices of all investors. We also derive a zero-beta valuation formula for the model which is somehow surpringly elegant.