This paper analyses the portfolio problem of an investor maximizing the expected exponential utility of his terminal real wealth. The investor must cope with both a set of stochastic investment opportunities and a set of background risks. If the market is complete we are able to find an exact solution. If the market is incomplete, we suggest an approximated general solution. Contrary to other e...

In the cross-section of households, the portfolio share rises in wealth and has a non-decreasing age profile. The standard life-cycle model with homothetic utility and non-tradable labor income has the counterfactual implication that the portfolio share falls in both wealth and age. We develop a life-cycle model in which households have nonhomothetic utility over two types of consumption goods,...

Forward-looking agents care about expected future utility flows, and hence have higher current felicity if they are optimistic. This paper studies utility-based biases in beliefs by supposing that beliefs maximize average felicity, optimally balancing this benefit of optimism against the costs of worse decision making. A small optimistic bias in beliefs typically leads to first-order gains in a...

This paper examines the conditions required to guarantee positive prices in the CAPM. Positive prices imply an upper bound on the equity premium. This upper bound depends on the degree of diversity of firms’ fundamentals, and it is independent of investors’ preferences. In economies with realistically diverse assets the only positive-price CAPM equilibrium theoretically possible is a degenerate...

Using a variety of different definitions of “neutrality,” this study presents significant evidence against the neutrality to market risk of hedge funds in a range of style categories. I generalize standard definitions of “market neutrality,” and propose five different neutrality concepts. I suggest statistical tests for each neutrality concept, and apply these tests to a database of monthly ret...

Recent work on intertemporal choice has varied the specification of every key aspect of modeling except the opportunity cost of consumption. We present evidence that consumers have present-biased perceptions of this parameter: they tend to underestimate the cost of short-term borrowing and the return to long-term saving. We develop a new theory that fits this evidence and is based on a more gen...

This study examines whether institutional investors’ voting for All-Star financial analysts is affected by analyst beauty. Using a sample of 1,135 U.S. analysts and controlling for analyst performance, we document that beauty, on average, does not affect the outcome of All-Star analyst voting. However, a beauty premium emerges in those sectors where there is high information asymmetry on analys...

Robust portfolio optimization has been developed to resolve the high sensitivity to inputs of the Markowitz mean-variance model. Although much effort has been put into forming robust portfolios, there have not been many attempts to analyze the characteristics of portfolios formed from robust optimization. We investigate the behavior of robust portfolios by analytically describing how robustness...

In this paper we propose a subsampling estimator for the distribution of statistics diverging at either known or unknown rates when the underlying time series is strictly stationary and strong mixing. Based on our results we provide a detailed discussion how to estimate extreme order statistics with dependent data and present two applications to assessing nancial market risk. Our method perform...

In this paper we argue that in realistically calibrated two period general equilibrium models with incomplete markets CAPM-pricing provides a good benchmark for equilibrium prices even when agents are not mean-variance optimizers and returns are not normally distributed. We numerically approximate equilibria for a variety of di erent speci cations for preferences, endowments and dividends and c...