Aggregation of Heterogeneous Beliefs and Asset Pricing: A Mean-Variance Analysis

The aim of this paper is to show, within the mean-variance framework, how the market belief can be constructed as the result of the aggregation of heterogeneous beliefs and how the market equilibrium prices of risky assets can thus be determined. The heterogeneous beliefs are defined in terms of not only the means but also variances and covariances. By constructing the mean and variance of the market belief, we analyze the impact of the heterogeneous beliefs on the market equilibrium asset pricing relation. In particular, we extend the standard CAPM under homogenous beliefs to the one under the heterogeneous beliefs.