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Bayesian Theory and Applications$
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Bayesian Theory and Applications

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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Asset allocation in finance: a Bayesian perspective

Asset allocation in finance: a Bayesian perspective

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

ERIC JACQUIER

NICHOLAS G. POLSON

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199695607.003.0025

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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