w-MPS Risk Aversion and the CAPM

21 Pages Posted: 9 May 2011

See all articles by Chenghu Ma

Chenghu Ma

Fudan University - School of Management

Phelim P. Boyle

Wilfrid Laurier University - School of Business & Economics; University of Waterloo

Date Written: May 4, 2011

Abstract

This paper establishes general conditions for the validity of mutual fund separation and the equilibrium CAPM. We use partial preference orders that display weak form mean preserving spread (w-MPS) risk aversion in the sense of Ma (2011). We derive this result without imposing any distributional assumptions on asset returns. The results hold even when the market contains an infinite number of securities and a continuum number of traders, and when each investor is permitted to hold some (arbitrary) finite portfolios. A proof of existence of equilibrium CAPM is provided for finite economies by assuming that when preferences constrained on the market subspace spanned by the risk free bond and the market portfolio admit continuous utility representations.

Keywords: CAPM, w-MPS, Risk Aversion, Infinite & Incomplete Market, Non-Gaussian Returns

JEL Classification: D50, G10, G11

Suggested Citation

Ma, Chenghu and Boyle, Phelim P., w-MPS Risk Aversion and the CAPM (May 4, 2011). Available at SSRN: https://ssrn.com/abstract=1832004 or http://dx.doi.org/10.2139/ssrn.1832004

Chenghu Ma (Contact Author)

Fudan University - School of Management ( email )

No. 670, Guoshun Road
Shanghai, 200433
China

Phelim P. Boyle

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada
519 884 1970 (Phone)
519 888 1015 (Fax)

University of Waterloo

Waterloo, Ontario N2L 3G1
Canada

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