Projects per year
Abstract
We consider a financial market in which two securities are traded: a stock and an index. Their prices are assumed to satisfy the BlackScholes model. Besides assuming that the index is a tradable security, we also assume that it is efficient, in the following sense: we do not expect a prespecified selffinancing trading strategy whose wealth is almost surely nonnegative at all times to outperform the index greatly. We show that, for a long investment horizon, the appreciation rate of the stock has to be close to the interest rate (assumed constant) plus the covariance between the volatility vectors of the stock and the index. This contains both a version of the Capital Asset Pricing Model and our earlier result that the equity premium is close to the squared volatility of the index.
Original language  English 

Number of pages  9 
Publication status  Published  23 Sep 2011 
Keywords
 BlackScholes model
 efficient market hypothesis
 efficient index
 CAPM
Projects
 1 Finished

The Decision Theory of Hiring and Firing Advisors
Netherlands Organisation for Scientific Research
1/02/11 → 31/01/13
Project: Research