The investor 's objective is to maximize the portfolio 's expected return, subject to an acceptable level of risk (or minimize risk, subject to an acceptable expected return). The assumption of a single time period, coupled with assumptions about the investor 's attitude toward risk, allows risk to be measured by the variance (or standard deviation) of the portfolio 's return. Thus, as indicated by the arrow in Figure 1, the investor is trying to go as far northwest as possible. As securities are added to a portfolio, the expected return and standard deviation change in very specific ways, based on the way in which the added securities co-vary with the other securities in the portfolio. An investor who can live with a lot of risk might choose
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Merton 's (1973) intertemporal capital asset pricing model (ICAPM) was developed to capture this multi-period aspect of financial market equilibrium. We still don 't know exactly how many factors there are, but the ICAPM at least gives us some guidance.
Consumption-Oriented Capital Asset Pricing Model The consumption-based model of Breeden (1979) provides a logical extension of the previous work in asset pricing. Based on this "diminishing marginal utility of consumption," securities that have high returns when aggregate consumption is low will be demanded by investors, bidding up their prices (and lowering their expected returns). In contrast, stocks that co-vary positively with aggregate consumption will require higher expected returns, since they provide high returns during states of the economy where the high returns do the least good.
Based on this line of reasoning, Breeden derives a consumption-based capital asset pricing model (CCAPM) of the form:
CCAPM E(Rj) = Rf + ßjC [E(Rm) - …show more content…
Ranging from marketwide investments to component strategies investing in specific asset classes, each portfolio combines rigorous research into the underlying drivers of returns with efficient execution in complex markets.Dimensional’s marketwide strategies are designed to emphasize securities with higher expected returns and minimize unnecessary turnover, which helps reduce overall expenses. Highly diversified and efficient, these comprehensive solutions can serve as portfolio cores, simplifying investors’ equity allocation decisions. We build marketwide strategies that are broadly diversified across sectors, industries, and market capitalization segments. This helps manage risk and increase opportunities to add value.The component equity strategies managed by Dimensional focus on specific segments of the market to pursue higher expected returns. These strategies can be used to create a customized asset allocation or to supplement a marketwide strategy. Dimensional designs asset class strategies to be robust—clearly targeting the desired market segment while keeping enough flexibility to allow for efficient
Merton 's (1973) intertemporal capital asset pricing model (ICAPM) was developed to capture this multi-period aspect of financial market equilibrium. We still don 't know exactly how many factors there are, but the ICAPM at least gives us some guidance.
Consumption-Oriented Capital Asset Pricing Model The consumption-based model of Breeden (1979) provides a logical extension of the previous work in asset pricing. Based on this "diminishing marginal utility of consumption," securities that have high returns when aggregate consumption is low will be demanded by investors, bidding up their prices (and lowering their expected returns). In contrast, stocks that co-vary positively with aggregate consumption will require higher expected returns, since they provide high returns during states of the economy where the high returns do the least good.
Based on this line of reasoning, Breeden derives a consumption-based capital asset pricing model (CCAPM) of the form:
CCAPM E(Rj) = Rf + ßjC [E(Rm) - …show more content…
Ranging from marketwide investments to component strategies investing in specific asset classes, each portfolio combines rigorous research into the underlying drivers of returns with efficient execution in complex markets.Dimensional’s marketwide strategies are designed to emphasize securities with higher expected returns and minimize unnecessary turnover, which helps reduce overall expenses. Highly diversified and efficient, these comprehensive solutions can serve as portfolio cores, simplifying investors’ equity allocation decisions. We build marketwide strategies that are broadly diversified across sectors, industries, and market capitalization segments. This helps manage risk and increase opportunities to add value.The component equity strategies managed by Dimensional focus on specific segments of the market to pursue higher expected returns. These strategies can be used to create a customized asset allocation or to supplement a marketwide strategy. Dimensional designs asset class strategies to be robust—clearly targeting the desired market segment while keeping enough flexibility to allow for efficient