Premium
Equilibrium with divergence of opinion
Author(s) -
Miller Edward M
Publication year - 2000
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/s1058-3300(00)00010-0
Subject(s) - economics , rate of return , asset (computer security) , portfolio , expected return , monetary economics , financial economics , actuarial science , finance , computer security , computer science
Since the less informed incorrectly estimate asset returns, they anticipate higher returns from their risky investments. They thus over‐invest in risky securities. They are rewarded by higher total portfolio returns. Too high a proportion of less‐informed investors lowers the return on risky assets. Equilibrium requires that the less informed's rate of return equal the informed's. The less informed control a stable equilibrium percentage of total wealth. Since an individual's recent investment experience correlates with his terminal wealth, learning need not reduce the less informed's risky asset exposure. Implications exist for the slope of the return versus systematic risk curve.