Abstract
This chapter presents evidence that shows how some investors are either irrational or do not know how to select the best investment for themselves. In the mean-variance framework all investors, regardless of their preferences, should diversify between a given portfolio located on the efficient frontier and the riskless asset. This property is well known as the separation theorem, which is necessary to derive the capital asset pricing model (CAPM). The improvement in the subjects' performance with an increase in the reward hints at the importance of making the experiment as close as possible to reality. The CAPM implies that in equilibrium all investors should hold the market portfolio composed of all risky assets. Even in an ideal situation, the investors choose inefficient portfolios located to the right of the mean-variance efficient frontier. Yet the fundamental risk-return CAPM or generalized CAPM (GCAPM) linear relationship is intact, explaining about 70% of the variability of the rates of return.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
