Journal of Finance and Economics

Journal of Finance and Economics

ISSN: 2291-4951 (Print)    ISSN: 2291-496X (Online)

Volume 5 (2017), No. 2, Pages 1-21

DOI: 10.12735/jfe.v5n2p01

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Modelling Alpha in a CAPM with Heterogenous Beliefs

Anke Gerber1  Thorsten Hens2 

1Department of Economics, University of Hamburg, Germany
2Swiss Banking Institute, University of Zurich, Switzerland and Norwegian School of Economics and Business Administration, Norway


To Cite this Article     Article Views: 379     Downloads: 282  Since deposited on 2017-08-07


The alpha is one of the most used terms in finance. Yet, the alpha is mystical since it has no theory. It is, for example, in contradiction to the standard CAPM with homogenous beliefs. The purpose of this paper is to show that the alpha naturally arises in a financial market equilibrium when the CAPM is extended to heterogenous beliefs. We show that the hunt for alpha-opportunities is a zero-sum game and that alpha-opportunities erode with the assets under management. Moreover, it is shown that a positive alpha is not necessarily a good criterion for the choice between active and passive investment. Finally, we argue that the standard CAPM with homogenous beliefs can be seen as the long run outcome of our model when investors' expectations are linked to the trading success.

JEL Classifications: G11, G12, G14

Keywords: CAPM, heterogenous beliefs, active and passive investment

To Cite this Article: Gerber, A., & Hens, T. (2017). Modelling alpha in a CAPM with heterogenous beliefs. Journal of Finance and Economics, 5(2), 1-21.

Copyright © A. Gerber & T. Hens

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This article is published under license to Science and Education Centre of North America. This is an Open Access article distributed under the terms of the Creative Commons Attribution 4.0 International License.

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Modelling Alpha in a CAPM with Heterogenous Beliefs