An agent based modeling framework to evaluate the Capital Asset Pricing Model

This paper presents the findings of a research effort to create an agent based economy where investors collect information and simultaneously make decisions about how much of their wealth they are each willing to risk. As an extension of the capital asset pricing model (CAPM), the investors must choose how much of their wealth to allocate between a risk-free asset and the risky asset. The price of the risky asset will fluctuate depending upon the price at which the investors in the market are willing to buy and sell. The investor's perception of the asset's correct price will change as news is introduced to various players in the market. The framework can be manipulated to answer many questions surrounding CAPM and modern portfolio theory particularly whether an equilibrium state will emerge and whether certain investors have a tendency to make above-average returns. The major finding of the research is that while patterns emerge in some simulations few patterns persist in all or most simulations.