I study the dynamics of asset prices in an economy in which investors choose whether to hold diversified or levered concentrated portfolios of risky assets. The latter are valuable, as they increase the productivity of the corresponding enterprises. I capture the tradeoff between risk sharing and productivity gains by introducing what I call "active capital": people who participate in such investments are restricted in their outside opportunities but receive extra compensation. In equilibrium, active and standard capital coexist. The willingness to provide active capital is mainly determined by risk considerations. Therefore, the quantity of active capital fluctuates jointly with risk premia, amplifying their variations. As a consequence, the price of volatility risk exposure can be large and return volatility is mainly induced by fluctuations in future expected returns. These results are particularly strong when fundamental volatility is low, because at such time, a large number of concentrated owners are likely to exit their positions and sell off their assets.
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