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Portfolio Inefficiency and the Cross-Section of Expected Returns

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  • Kandel, Shmuel
  • Stambaugh, Robert F

Abstract

The capital asset pricing model implies that the market portfolio is efficient and expected returns are linearly related to betas. Many do not view these implications as separate, since either implies the other, but the authors demonstrate that either can hold nearly perfectly while the other fails grossly. If the index portfolio is inefficient, then the coefficient and R[squared] from an ordinary least squares regression of expected returns on betas can equal essentially any values and bear no relation to the index portfolio's mean-variance location. That location does determine the outcome of a mean-beta regression fitted by generalized least squares. Copyright 1995 by American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 50 (1995)
Issue (Month): 1 (March)
Pages: 157-84

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Handle: RePEc:bla:jfinan:v:50:y:1995:i:1:p:157-84

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  1. Shumel Kandel & Robert F. Stambaugh, . "A Mean-Variance Framework for Tests for Asset Pricing Models," Rodney L. White Center for Financial Research Working Papers 25-88, Wharton School Rodney L. White Center for Financial Research.
  2. Roll, Richard, 1977. "A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory," Journal of Financial Economics, Elsevier, vol. 4(2), pages 129-176, March.
  3. Shanken, Jay, 1987. "Multivariate proxies and asset pricing relations : Living with the Roll critique," Journal of Financial Economics, Elsevier, vol. 18(1), pages 91-110, March.
  4. Ravi Jagannathan & Zhenyu Wang, 1993. "The CAPM is alive and well," Staff Report 165, Federal Reserve Bank of Minneapolis.
  5. Ross, Stephen A, 1977. "The Capital Asset Pricing Model (CAPM), Short-Sale Restrictions and Related Issues," Journal of Finance, American Finance Association, vol. 32(1), pages 177-83, March.
  6. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 1-33.
  7. Shanken, Jay, 1985. "Multivariate tests of the zero-beta CAPM," Journal of Financial Economics, Elsevier, vol. 14(3), pages 327-348, September.
  8. Kandel, Shmuel & Stambaugh, Robert F., 1987. "On correlations and inferences about mean-variance efficiency," Journal of Financial Economics, Elsevier, vol. 18(1), pages 61-90, March.
  9. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  10. Roll, Richard, 1985. "A note on the geometry of Shanken's CSR T2 test for mean/variance efficiency," Journal of Financial Economics, Elsevier, vol. 14(3), pages 349-357, September.
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  1. Existence Theorems
    by Eric Falkenstein in Falkenblog on 2008-04-23 16:27:00
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