SEPTEMBER 1977 RISK, UNCERTAINTY, AND DIVERGENCE OF OPINION EDWARD MILLER* M. THE THEORY OF investor behavior in a world of uncertainty has been set out by several writers including Sharpe (1964) and Lintner (Feb. 1965). A key assumption of the now standard capital asset model is what Sharpe calls homothetic expectations. All investors are assumed to have identical estimates of the expected return and probability distribution of return from all securities. However, it is implausible to assume that although the future is very uncertain, and forecasts are very difficult to make, that somehow everyone makes identical estimates of the return and risk from every security. In practice, the very concept of uncertainty implies that reasonable men may differ in their forecasts. This paper will explore some of the implications of a market with restricted short selling in which investors have differing estimates of the returns from investing in a risky security.' Explanations will be offered for the very low returns on the stocks in the highest risk classes, the poor long run results on new issues of stocks, the presence of discounts from net value for closed end investment companies, and the lower than predicted rates of return
The Journal of Finance – Wiley
Published: Sep 1, 1977
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