The evolution of portfolio rules and the capital asset pricing model (Q2505519)

The focus of the paper is the studying of a capital asset pricing model (CAPM) in an evolutionary framework, and, in particular, the testing of the performance of the standard version of CAPM in an evolutionary setting. Imagine a heterogeneous population of long-lived agents who invest according to different portfolio rules and the question is what is the asymptotic market share of those who happen to behave as prescribed by CAPM. It is necessary to detect the asymptotic properties of the wealth shares of the traders that either ``believe'' in CAPM and use it as the rule of thumb for their portfolio decisions, or display genuine mean-variance behavior. The results of the paper suggest that there are several circumstances of economic interest in which their wealth share will converge almost surely to zero. A condition sufficient to drive CAPM traders to extinction is that an investor endowed with a logarithmic utility function enters the market.