The first two parts of the book explain portfolio choice and asset

pricing theory in single-period, discrete-time, and continuous-time models. For

valuation, the focus throughout is on stochastic discount factors and their

properties. A section on derivative securities covers the usual derivatives

(options, forwards and futures, and term structure models) and also

applications of perpetual options to corporate debt, real options, and optimal

irreversible investment. A chapter on “explaining puzzles” and the

last part of the book provide introductions to a number of additional current

topics in asset pricing research, including rare disasters, long-run risks,

external and internal habits, asymmetric and incomplete information,

heterogeneous beliefs, and non-expected-utility preferences. Each chapter

includes a “Notes and References” section providing additional

pathways to the literature.

- When the expected return of an asset is unknown and is estimated from past returns, the myopic demand is a momentum strategy.
- Filtering theory is applied to analyze portfolio choice and equilibrium asset prices.
- The institutional subscription may not cover the content that you are trying to access.
- When the consumption growth rate follows a Markov chain with hidden states, return volatility tends to be higher when investors are less certain about which state the economy is in.
- The first two parts of the book explain portfolio choice and asset pricing theory in single‐period, discrete‐time, and continuous‐time models.

Optimal investments are independent of initial wealth for investors with constant absolute risk aversion. Optimal investments are affine functions of initial wealth for investors iwth linear risk tolerance. The optimal portfolio for an investor with constant absolute risk aversion is derived when asset returns are normally distributed. Investors with quadratic utility have mean‐variance preferences, and investors have mean‐variance preferences when returns are elliptically distributed.

## Access this article

Continuous‐time filtering is explained, including the Kalman filter and filtering for a Markov chain with hidden states. Filtering theory is applied to analyze portfolio choice and equilibrium asset prices. When the expected return of an asset is unknown and is estimated from past returns, the myopic demand is a momentum strategy. When investors learn expected consumption growth from realized consumption growth, equilibrium prices are more sensitive to consumption shocks and the equity premium is higher. When the consumption growth rate follows a Markov chain with hidden states, return volatility tends to be higher when investors are less certain about which state the economy is in. We survey the literature that has explored the implications of decision-making under ambiguity for financial market outcomes, such as portfolio choice and equilibrium asset prices.

- The first two parts of the book explain portfolio choice and asset

pricing theory in single-period, discrete-time, and continuous-time models. - For valuation, the focus throughout is on stochastic discount factors and their properties.
- For full access to this pdf, sign in to an existing account, or purchase an annual subscription.
- Optimal investments are independent of initial wealth for investors with constant absolute risk aversion.

The CAPM and the Fama‐French‐Carhart model are evaluated relative to portfolios based on sorts on size, book‐to‐market, and momentum. If your institution is not listed or you cannot sign in to your institution’s website, please contact your librarian or administrator.

## Table of Contents

The institutional subscription may not cover the content that you are trying to access. If you believe you should have access to that content, please contact your librarian. A personal account can be used to get email alerts, save searches, purchase content, and activate subscriptions. For full access to this pdf, sign in to an existing account, or purchase an annual subscription. Some societies use Oxford Academic personal accounts to provide access to their members. Shibboleth / Open Athens technology is used to provide single sign-on between your institution’s website and Oxford Academic.

## that making some private information public will reduce the risk premium of a stock

For librarians and administrators, your personal account also provides access to institutional account management. Here you will find options to view and activate subscriptions, manage institutional settings and access options, access usage statistics, and more. In

the 2nd edition of Asset Pricing and portfolio Choice Theory, Kerry

E. Back offers a concise yet comprehensive introduction to and overview of

asset pricing.

## Asset Pricing and Portfolio Choice Theory / Edition 1

This book is intended as a textbook for asset pricing theory courses at the Ph.D. or Masters in Quantitative Finance level and as a reference for financial researchers. The first two parts of the book explain portfolio choice and asset pricing theory in single‐period, discrete‐time, and continuous‐time models. For valuation, the focus throughout is on stochastic discount factors and their properties.

## Asset Pricing and Portfolio Choice Theory Hardcover – Illustrated, Aug. 26 2010

Typically, access is provided across an institutional network to a range of IP addresses. This authentication occurs automatically, and it is not possible to sign out of an IP authenticated account. Factors can be replaced by the returns or excess returns that are maximally correlated (the projections of the factors). A factor model is asset pricing and portfolio choice theory equivalent to an affine representation of an SDF and to spanning a return on the mean‐variance frontier. Statistical factor models are defined as models in which factors explain the covariance matrix of returns. A proof is given of the Arbitrage Pricing Theory, which states that statistical factors are approximate pricing factors.

## Contents

Traditional factor models, including the CAPM, are related to or derived from stochastic discount factors. A chapter on stochastic calculus provides the needed tools for analyzing continuous‐time models. The portfolio choice model is introduced, and the first‐order condition is derived. Properties of the demand for a single risky asset are derived from second‐order risk aversion and decreasing absolute risk aversion.