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The Heterogeneous Investment Horizon and the Capital Asset Pricing Model: Theory and Implications

Published online by Cambridge University Press:  06 April 2009

Cheng F. Lee ,
Chunchi Wu  and
K. C. John Wei
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Abstract

This paper generalizes the risk-return relationship implied by the traditional capital asset pricing model with finite investment horizons. It examines the effect of heterogeneous investment horizons on the functional form of capital asset pricing and proposes a translog model for estimating the risk-return relationship. In addition, this paper contends that some empirical findings that are inconsistent with the traditional CAPM have resulted from misspecification of the CAPM by ignoring the discrepancy between the observed data periods and the true investment horizons. Finally, the paper shows that under various conditions, the translog model is a suitable function for estimating the relationship between risk and expected returns.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 25 , Issue 3 , September 1990 , pp. 361 - 376
Copyright
Copyright © School of Business Administration, University of Washington 1990

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