Theory of Asset Pricing

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1、Chapter1ExpectedUtilityandRiskAversionAssetpricesaredeterminedbyinvestors’riskpreferencesandbythedistrib-utionsofassets’riskyfuturepayments.Economistsrefertothesetwobasesofpricesasinvestor"tastes"andtheeconomy’s"technologies"forgeneratingassetreturns.Asatisfactorytheoryofassetvaluationmustco

2、nsiderhowin-dividualsallocatetheirwealthamongassetshavingdifferentfuturepayments.Thischapterexploresthedevelopmentofexpectedutilitytheory,thestandardapproachformodelinginvestorchoicesoverriskyassets.Wefirstanalyzetheconditionsthatanindividual’spreferencesmustsatisfytobeconsistentwithanexpected

3、utilityfunction.Wethenconsiderthelinkbetweenutilityandrisk-aversion,andhowrisk-aversionleadstoriskpremiaforparticularassets.Ourfinaltopicexamineshowrisk-aversionaffectsanindividual’schoicebetweenariskyandarisk-freeasset.Modelinginvestorchoiceswithexpectedutilityfunctionsiswidely-used.However,s

4、ignificantempiricalandexperimentalevidencehasindicatedthat34CHAPTER1.EXPECTEDUTILITYANDRISKAVERSIONindividualssometimesbehaveinwaysinconsistentwithstandardformsofex-pectedutility.Thesefindingshavemotivatedasearchforimprovedmodelsofinvestorpreferences.Theoreticalinnovationsbothwithinandoutsidet

5、heexpectedutilityparadigmarebeingdeveloped,andexamplesofsuchadvancesarepresentedinlaterchaptersofthisbook.1.1PreferenceswhenReturnsareUncertainEconomiststypicallyanalyzethepriceofagoodorservicebymodelingthenatureofitssupplyanddemand.Asimilarapproachcanbetakentopriceanasset.Asastartingpoint,l

6、etusconsiderthemodelingofaninvestor’sdemandforanasset.Incontrasttoagoodorservice,anassetdoesnotprovideacurrentconsumptionbenefittoanindividual.Rather,anassetisavehicleforsaving.Itisacomponentofaninvestor’sfinancialwealthrepresentingaclaimonfutureconsumptionorpurchasingpower.Themaindistinctionb

7、etweenassetsisthedifferenceintheirfuturepayoffs.Withtheexceptionofassetsthatpayarisk-freereturn,assets’payoffsarerandom.Thus,atheoryofthedemandforassetsneedstospecifyinvestors’preferencesoverdifferent,uncertainpayoffs.Inotherwords,weneedtomodelhowinvest