We propose a novel no-arbitrage framework, which exploits convex asset pricing constraints to study investors' marginal utility of wealth or, more generally, Stochastic Discount Factors (SDFs).
We establish a duality between minimum dispersion SDFs and penalized portfolio selection problems, building the foundation for characterizing the feasible tradeoffs between a SDF's pricing accuracy and its comovement with systematic risks. Empirically, a minimum variance CAPM-SDF produces a Pareto optimal tradeoff. This SDF only depends on two distinct risk factors: A traded market factor and a minimum variance excess return that bounds the mispricing of risks unspanned by market shocks.
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