TITLE:
w-MPS Risk Aversion and the CAPM
AUTHORS:
Phelim P. Boyle, Chenghu Ma
KEYWORDS:
CAPM; w-MPS; Risk Aversion; Infinite & Incomplete Market; Non-Gaussian Returns
JOURNAL NAME:
Theoretical Economics Letters,
Vol.3 No.6,
December
5,
2013
ABSTRACT: This paper establishes general conditions for the validity of mutual
fund separation and the equilibrium CAPM. We use partial preference orders that
display weak form mean preserving spread (w-MPS) risk aversion in the sense of
Ma (2011). We derive this result without imposing any distributional
assumptions on asset returns. The results hold even when the market contains an
infinite number of securities and a continuum number of traders, and when each
investor is permitted to hold some (arbitrary) finite portfolios. A proof of
existence of equilibrium CAPM is provided for finite economies by assuming that
when preferences are constrained on the market subspace spanned by the risk
free bond, the market portfolios admit continuous utility representations.