Professional Documents
Culture Documents
Corrections to
Theory of Asset Pricing (2008), Pearson, Boston, MA
1. Page 7. Revise the Independence Axiom to read:
For any two lotteries 1 and 1
, 1
:
`1
+ (1 `)1
`1 + (1 `)1
:
`1 + (1 `)1
`1
y
+ (1 `)1
j=1
.
m
j
o
ij
(3.11)
5. Page 73. To indicate that it is a column vector, add a prime after /
z
=
[/
1z
/
2z
... /
nz
]
0
, . = 1. .... /.
6. Page 93. It is clearer to write equation (4.41) as
c
s
=
_
_
\
1
.
.
.
\
s1
\
s
\
s+1
.
.
.
\
k
_
_
=
_
_
0
.
.
.
0
1
0
.
.
.
0
_
_
(4.41)
7. Page 137. In Exercise 4 part a., it should read Show whether or not j
t
=
,
t
+ /
t
, subject to the specications in (6.39) and (6.40), is a valid solution
for the price of the risky asset.
8. Page 165. In footnote 1, revise the sentence We examine how to model
an asset price process that is a mixture of a diusion process and a jump
process in Chapter 11.
1
See Chamberlain (1983) and Liu (2004).
2
9. Page 167 to 168. It should be noted that there may be other probability lim-
its, in addition to the normally-distributed Brownian motion, for processes
that have independent and identically distributed increments. For example,
a compensated Poisson process can have zero mean and variance propor-
tional to time but would not have a limiting distribution that is Brownian
motion. To obtain normality, we also need to assume a continuous sample
path. See Merton (1990, Chapter 3).
10. Page 185. Equation (9.13) has an extraneous j. It should read
dH (t) =
_
n
i=1
.
i
(t) (j
i
:) H (t) + :H (t) 1 (t)
_
dt +
n
i=1
.
i
(t) H (t) o
i
d.
i
(9.13)
11. Page 193. Equation (9.40) has an extraneous c. It should read
2
r
2
1
rr
+ [c(: :) + o
r
] 1
r
:1 1
= 0 (9.40)
12. Page 200. Exercise 2 should state where c, :, and o are positive constants.
13. Page 207. In equation (10.12), : should be changed to n :
= exp
_
_
0
o (n) d.
1
2
_
0
o (n)
2
dn
_
(10.12)
14. Page 233. Under equation (11.23), the denition should be :
n
: `/ +
:c,t.
15. Page 257. The last term after the rst equality in equation (12.45) should
have a minus sign and, therefore, the last term after the second equality in
equation (12.45) will have a plus sign:
0 = l (C
t
. t) + J
t
+ J
W
[:\
t
C
t
] + c (r. t) J
x
+
1
2
/ (r. t)
2
J
xx
J
2
W
2J
WW
n
i=1
n
j=1
ij
_
j
j
:
_
(j
i
:)
= c
t
ln
_
\
t
d (t)
_
+ c
t
_
Jd (t)
Jt
jd (t)
_
ln [\
t
] + 1
t
+ c
t
d (t) : c
t
+c (r. t) 1
x
+
1
2
/ (r. t)
2
1
xx
+
d (t) c
t
2
n
i=1
n
j=1
ij
_
j
j
:
_
(j
i
:)
(12.45)
3
Similarly, this makes the last terms in equations (12.46) and (12.49) to have
plus signs:
0 = ln [d (t)] +
_
1 +
Jd (t)
Jt
jd (t)
_
ln [\
t
] + c
t
1
t
+ d (t) : 1
+c (r. t) c
t
1
x
+
1
2
/ (r. t)
2
c
t
1
xx
+
d (t)
2
n
i=1
n
j=1
ij
_
j
j
:
_
(j
i
:)
(12.46)
0 = ln [d (t)] + c
t
1
t
+ d (t) : 1 + c (r. t) c
t
1
x
(12.49)
+
1
2
/ (r. t)
2
c
t
1
xx
+
d (t)
2
n
i=1
n
j=1
ij
_
j
j
:
_
(j
i
:)
16. Page 310. In the second paragraph, the reference to (14.58) should be
(14.57): ...the utility function given in (14.56) and (14.57) is (ordinally)
equivalent...
17. Page 312. In the rst sentence, change partial dierential equation to
ordinary dierential equation.
18. Page 313 The rst three sentences on this page should read Similar to
the time-separable case, for an innite horizon solution to exist, we need
consumption to be positive in (14.70), which requires
j
c 1
c
_
: + [j :]
2
,
_
2 (1 ) o
2
_
.
This will be the case when the elasticity of intertemporal substitution, c, is
suciently small. For example, assuming j 0, this inequality is always
satised when c < 1.
19. Page 324. Correct the denition of n
t
to be n
t
denotes the number of
shares of the risky asset held by the individual at date t.
20. Page 325. In the rst paragraph below equation (15.5), the fourth sentence
should be corrected to read Conversely, when j = 1 but 1
t
< 1, .
t
is larger
than .
t1
.
4
21. Page 328. Insert expected in the sentence This portfolio policy is referred
to as the growth-optimum portfolio, because it maximizes the expected
(continuously compounded) return on wealth.
22. Page 348. In the fourth paragraph, correct the variance so that the sentence
reads The equilibrium would be the same if all traders received the same
signal, `(:. o
2
+
2
n
) or if they all decided to share information on
their private signals among each other before trading commenced.
23. Page 350. In equations (16.19), (16.21), and in the text below (16.21), re-
move the extraneous right parenthesis to change Var
_
~
1
1
j 1
i
)
_
to Var
_
~
1
1
j 1
i
_
.
References
[1] Chamberlain, G. (1983): A Characterization of the Distributions That Imply
Mean-Variance Utility Functions, Journal of Economic Theory, 29, 185-201.
[2] Liu, L. (2004): A New Foundation for the Mean-Variance Analysis, Euro-
pean Journal of Operational Research, 158, 229-242.
[3] Merton, R.C. (1990): Continuous-Time Finance. Blackwell, Cambridge, MA.
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