Portfolio Advice for a Multifactor World

John H. Cochrane

NBER Working Paper No. 7170
Issued in June 1999
NBER Program(s):   AP   EFG

Asset returns, it turns out, do not follow the Capital Asset Pricing Model, and are somewhat predictable over time. I survey and interpret the large body of recent work that adapts traditional portfolio theory to answer, what should an investor do about these new facts in finance? I survey the extension of the famous 2 - fund' theorem to an N-fund'' theorem in which investors either hedge or assume the additional, non-market, sources of priced risk; I survey the burgeoning literature on time-varying portfolio rules and the Bayesian literature that advocates a great deal of caution. In a survey, I emphasize the risk-sharing nature of asset markets, I note the likelihood that many supposed anomalies will not last, and I emphasize the fact that the average investor must hold the market so portfolio decisions must be driven by differences between an investor and the average investor.

(388 K)

This paper is available as PDF (388 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w7170

Published: Economic Perspectives, Federal Reserve Bank of Chicago, Vol. 23, no. 3(1999): 59-78. citation courtesy of

Users who downloaded this paper also downloaded these: