Portfolio Advice for a Multifactor World

John H. Cochrane

NBER Working Paper No. 7170
Issued in June 1999
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth

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.

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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

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