Making financial decisions under risk and uncertainty has become part of everyday life. Traditional finance explores the objective side of risk, analysing the decisions made by perfectly rational individuals in efficient market conditions. Behavioural finance seeks to connect theory with...

Suppose a fund manager uses predictors in changing portfolio allocations over time. How does predictability translate into portfolio decisions? To answer this question we derive a new model within the Bayesian framework, where managers are assumed to modulate the systematic risk in part by...