A DEMONSTRATION OF THE CAPITAL ASSET PRICING MODEL UNDER AMBIGUITY

Investors are risk averse, so they will choose to hold a portfolio of securities to take advantage of the benefits of diversification. Therefore, when they are deciding whether or not to invest in a particular stock, they want to know how the stock will contribute to the risk and expected return of their portfolios. Supposing that all investors assume the same probability distribution on the set Ω of states of the world, the Capital Asset Pricing Model (CAPM) [1] provides an expression which relates the expected return of an asset to its systematic risk. Purpose of the present paper is to give a demonstration of the Capital Asset Pricing Model, supposing that each agent has a subjective probability distribution on the set Ω