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The Log-Normal Asset Pricing Model (Lapm)

Author

Listed:
  • ALLON COHEN

    (The School of Business Administration, The Hebrew University, Mt. Scopus, Jerusalem 91905, Israel)

  • HAIM LEVY

    (The School of Business Administration, The Hebrew University, Mt. Scopus, Jerusalem 91905, Israel)

Abstract

We derive a discrete Log-Normal Asset Pricing Model (LAPM) based on log-normal distributed risky asset returns. Providing an analytical description of the efficient frontier in E(Log(R))-STD(Log(R)) space, we than show that under the log-normality of returns' assumption a segmented market equilibrium is created. The LAPM overcomes some of the drawbacks of the CAPM, hence better conforms with empirical observation; it shows how different portfolios of risky assets may be optimal for different investors; it shows why optimal portfolios may contain only a small number of risky assets, as well as why even with homogeneous expectations optimal portfolios for some investors may include risky assets held in short positions.

Suggested Citation

  • Allon Cohen & Haim Levy, 2005. "The Log-Normal Asset Pricing Model (Lapm)," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 1-34.
    • Handle: RePEc:wsi:afexxx:v:01:y:2005:i:01:n:s2010495205500028
    DOI: 10.1142/S2010495205500028
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    References listed on IDEAS

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    2. Martinez, Daisy V. B., 1974. "O Rio de Janeiro e seus arredores em 1824," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 14(2), April.
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    Cited by:

    1. Goddard, John & Onali, Enrico, 2012. "Self-affinity in financial asset returns," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 1-11.
    2. Moawia Alghalith & Xu Guo & Wing-Keung Wong & Lixing Zhu, 2016. "A General Optimal Investment Model In The Presence Of Background Risk," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 1-8, March.

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    More about this item

    Keywords

    Log-normal asset pricing model; asset returns; efficient frontier; optimal portfolios; mean-variance criterion; utility; G11; G12;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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