Heterogeneous Belief, Portfolio Choice And Stock Price

In the financial market, people can hear some ideas such as " the investors' belief was frustrated ", "the investors' confidence was boosted ", and "the investors' confidence should be adjusted" and so on. At the same time, there are many investment managers, who do not use the methods of the classical traditional financial theory but the empirical tools, observing the perspective of the markets, analyzing the investors' confidence and belief. So we can say that investors' confidence , belief and sentiment play important roles in the real market. However the traditional financial theory has been ignoring the practice strategies of investors, researching asset pricing by the assumption of rational expectation and single representative agent metaphysically. It is proved that neither the CAPM nor the Black-Scholes option-pricing model cannot succeed in practice. The same time the behavior finance and mentality economic lack an exacting and stable logic and paradigm, being not recognized by researchers.Meanwhile we have noticed that the price mechanism of fictitious economy is different from that of the real economy. In the real economy higher price leads to lower demand, but in financial market such as stock market the asset price doesn't obey the rule, always the higher price leads to higher demand (when the investors go in as price ascends and out as price decrease). So we can conclude that the investors expectation play a key role in the pricing mechanism, but the traditional asset pricing theories have been hold the homogeneous belief which doesn't meet the true market. So how to make the classical asset pricing theory near to the practice is a challenging task. The paper researched the portfolio choice and stock price, basing on the key definition "heterogeneous belief" and the framework of traditional finance theory.The belief means the subjective probability in financing explanation. The different subjective probability of investors leads to the different expectation, furthermore leads to the different perspective to the financial market. It is the visual definition of heterogeneous belief. The paper studied the impact of heterogeneous belief to the portfolio choice and stock price. In real stock market investors hold the portfolio heterogeneously: some one likes the single stock, some one like funds. Besides, the investors' portfolios change as the time passes. The paper studied the portfolio choice and stock price, finding the heterogeneous belief impacts the adjustment of the weight of portfolios and then leads to the difference of the portfolios and the new relationship between the demand and supply, and finally lead to the new price.One of the paper's tasks is to improve the traditional asset pricing theory, changing the assumption of the CAPM of the homogeneous belief into the heterogeneous belief, the single preventative into the diverse preventatives. The different agents are separated by heterogeneous belief such as using value investment methods or technical investment methods in the long run, judging the future in a positive way or a negative way in the short run. Because of the heterogeneity of belief, their investment portfolio frontiers are different from each other in the VAR-MEAN space, then their portfolios are different from each other. The paper analyzed the structure of the portfolios assuming the diverse representatives choose their portfolios by their utility function.The paper would also analyze the impact of the heterogeneous belief to the stock price. Many financial economist and investment managers have found that the dispersion of the heterogeneous belief would impact the stock price, and the impacting degree would be different for the difference of the scale and the price level. We set a asset pricing model to analyze the price mechanism of heterogeneous belief. The paper would test how the heterogeneous belief impacts the china stock market price (allowing for the data of traders is not plenary, we can't study empirically deeply) to gain some suggestions which may be useful to the investors.