Back to Search
Start Over
Market Equilibrium and the Cost of Capital with Heterogeneous Investment Horizons.
- Source :
- Risks; Mar2024, Vol. 12 Issue 3, p44, 16p
- Publication Year :
- 2024
-
Abstract
- 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. [ABSTRACT FROM AUTHOR]
Details
- Language :
- English
- ISSN :
- 22279091
- Volume :
- 12
- Issue :
- 3
- Database :
- Complementary Index
- Journal :
- Risks
- Publication Type :
- Academic Journal
- Accession number :
- 176368400
- Full Text :
- https://doi.org/10.3390/risks12030044