A Framework For CAPM With Heterogenous Beliefs

The authors introduce heterogeneous beliefs into the mean-variance framework of the standard CAPM, in contrast to the standard approach which assumes homogeneous beliefs. By assuming that agents form optimal portfolios based upon their heterogeneous beliefs about conditional means and covariances of the risky asset returns, they set up a framework for the CAPM that incorporates the heterogeneous beliefs when the market is in equilibrium. In this paper they construct a consensus belief (with respect to the means and covariances of the risky asset returns) to represent the aggregate market belief when the market is in equilibrium.