Handbook of the Economics of Finance

3.6 Beliefs

Differences in financial decisions, and notably in portfolio allocation, can reflect not only differences in risk preferences but also differences in beliefs about stock returns and volatility, as (3.1) suggests. Since Sharpe (1964), the standard assumption in portfolio models is that all investors have the same beliefs about stock market returns. This assumption has been defended by arguing that under market efficiency, private signals are revealed through prices and thus beliefs must be homogenous (Fama, 1970). However, its prevalence is probably more a matter of convenience than realism. This is partly due to the practical difficulty of obtaining information on investor beliefs. In recent years, however, reliable methodologies ...