Comparing asset pricing models: an investment perspective

We investigate the portfolio choices of mean-variance-optimizing investors who use sample evidence to update prior beliefs centered on either risk-bas ed or characteristic-based pricing models. With dogmatic beliefs in such mo dels and an unconstrained ratio of position size to capital, optimal portfo lios can differ across models to economically significant degrees. The diff erences are substantially reduced by modest uncertainty about the models' p ricing abilities. When the ratio of position size to capital is subject to realistic constraints,the differences in portfolios across models become ev en less important and are nonexistent in some cases. (C) 2000 Elsevier Scie nce S.A. All rights reserved.