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Bayesian Theory and Applications$
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Paul Damien, Petros Dellaportas, Nicholas G. Polson, and David A. Stephens

Print publication date: 2013

Print ISBN-13: 9780199695607

Published to Oxford Scholarship Online: May 2013

DOI: 10.1093/acprof:oso/9780199695607.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 13 May 2021

Asset allocation in finance: a Bayesian perspective

Asset allocation in finance: a Bayesian perspective

(p.501) 25 Asset allocation in finance: a Bayesian perspective
Bayesian Theory and Applications



Oxford University Press

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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