Portfolio Analysis And Zero-beta CAPM With Heterogeneous Beliefs

With the standard mean variance framework, by assuming heterogeneity and bounded rationality of investors, this paper examines their impact on the market equilibrium and implications to the portfolio analysis. By constructing a market consensus belief, the authors establish market equilibrium prices of risky assets and show that the standard Black's zero-beta CAPM under homogeneous beliefs holds under the heterogeneous belief. They demonstrate that the biased belief (from the market consensus belief) of investors makes their optimal portfolio not necessarily locate on the market mean-variance frontier.