Asset allocation in finance: a Bayesian perspective
Asset allocation in finance: a Bayesian perspective
This chapter shows how the principle of maximum expected utility (MEU) together with Stein's lemma for stochastic volatility distributions solves for optimal asset allocation. Stein's lemma provides the solution to the first-order condition that accompanies MEU. The optimal asset allocation problem couched in equilibrium then leads to models such as the Capital Asset Pricing Model (CAPM) or Merton's inter-temporal asset pricing model (ICAPM).
Keywords: maximum expected utility, Stein's lemma, stochastic volatility distributions, optical asset allocation
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