An individual investor’s demands for risky capital and riskless bonds depend on the investor’s subjective beliefs about the payoff to risky capital. This paper determines equilibrium asset prices and returns in a capital market in which investors have heterogeneous subjective expectations of...

Much of financial theory neglects transactions costs. Perhaps the most successful implementation of it -- i.e. continuous-time portfolio choice and option pricing -- is downright inconsistent with the existence of any transactions cost at all. Nonetheless prima facie evidence from the trade is...