Abstract
The Capital Asset Pricing Model predicts that investors will hold diversified portfolios, but many households actually hold very few assets. The paper examines the asset pricing implications of one possible explanation for this phenomenon, fixed costs of holding assets. While earlier authors found the exact asset pricing effects of such costs in single-period models under restrictive assumptions, I derive a general upper bound on these effects that is also valid in continuous time. Illustrative calculations reveal that large holding costs must be postulated to generate significant asset pricing effects.
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