The security market line (SML) accords with the capital asset pricing model (CAPM) by taking on an upward slope in … periods of optimism attract equity investment by unsophisticated, overconfident, traders in risky opportunities (high beta …

Because of risk aversion, any sensible investment valuation system should value less Projects that contribute more to … investment projects. I show in this paper that the economic consequences of the implied misallocation of capital are dire. To do … this, I calibrate a Lucas model in which the investment opportunity set contains a myriad of projects with different …