In rare disaster models, it is a major challenge to generate large equity premium and low risk-free rate by imposing realistic consumption jump size. This paper addresses this issue based on a dynamic general equilibrium production economy with learning about rare disasters. Essentially, the...

We study effects of correlation ambiguity on portfolio choice when the number of risky assets is large. We find that the optimal portfolio contains only a fraction of available risky assets. With 100 stocks randomly selected from the S&P 500, less than 20 stocks will be held in the optimal...