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The Fundamental Theorem of Parameter-Preference Security Valuation

  • Mark E. Rubinstein

Extract

Under the assumption that individuals are single-period maximizers of the expected utility of their future wealth, this essay extends the mean-variance security valuation model developed by Sharpe [10], Lintner [4, 5, and 6], and Mossin [7 and 8] to a general parameter-preference model, with and without the simplifications of homogeneous subjective probabilities and the existence of a risk-free security. Results with quadratic and cubic utility are developed as special cases.

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[1]Arrow, K.J. “The Theory of Risk Aversion.” In Essays in the Theory of Risk-Bearing, edited by Arrow, K.J.. Markham, 1971, pp. 90120. (First published without appendix in 1965 as Lecture 2 in Aspects of the Theory of Risk-Bearing, Yrjö Jahnsson Lectures, Helsinki.)
[2]Cass, D., and Stiglitz, J.E.. “The Structure of Investor Preferences and Asset Returns, and Separability in Portfolio Allocation: A Contribution to the Pure Theory of Mutual Funds.” Journal of Economic Theory, June 1970.
[3]Hakansson, N.H. “Risk Disposition and the Separation Property in Portfolio Selection.” Journal of Financial and Quantitative Analysis, December 1969.
[4]Lintner, J. “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets.” Review of Economics and Statistics, February 1965.
[5]Lintner, J. “The Aggregation of Investor's Diverse Judgments and Preferences in Purely Competitive Markets.” Journal of Financial and Quantitative Analysis, December 1969.
[6]Lintner, J. “The Market Price of Risk, Size of Market, and Investor's Risk Aversion.” Review of Economics and Statistics, February 1970.
[7]Mossin, J. “Equilibrium in a Capital Asset Market.” Econometrica, October 1966.
[8]Mossin, J. “Security Pricing and Investment Criteria in Competitive Markets.” American Economic Review, December 1969.
[9]Rubinstein, M.E. “A Comparative Statics Analysis of Risk Premiums.” Forthcoming in Journal of Business.
[10]Sharpe, W.F.Portfolio Theory and Capital Markets. New York: McGraw-Hill, 1970.
[11]Tobin, J. “Comment on Borch and Feldstein.” Review of Economic Studies, January 1969.

The Fundamental Theorem of Parameter-Preference Security Valuation

  • Mark E. Rubinstein

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