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Mean-Variance Efficiency of the Market Portfolio

Author

Listed:
  • Rafael Falcão Noda

    (FEA-USP)

  • Roy Martelanc

    (FEA-USP)

  • José Roberto Securato

    (FEA-USP)

Abstract

The objective of this study is to answer the criticism to the CAPM based on findings that the market portfolio is far from the efficient frontier. We run a numeric optimization model, based on Brazilian stock market data from 2003 to 2012. For each asset, we obtain adjusted returns and standard deviations such that (i) the efficient frontier intersects with the market portfolio and (ii) the distance between the adjusted parameters and the sample parameters is minimized. We conclude that the adjusted parameters are not significantly different from the sample parameters, in line with the results of Levy and Roll (2010) for the USA stock market. Such results suggest that the imprecisions in the implementation of the CAPM stem mostly from parameter estimation errors and that other explanatory factors for returns may have low relevance. Therefore, our results contradict the above-mentioned criticisms to the CAPM in Brazil.

Suggested Citation

  • Rafael Falcão Noda & Roy Martelanc & José Roberto Securato, 2014. "Mean-Variance Efficiency of the Market Portfolio," Brazilian Review of Finance, Brazilian Society of Finance, vol. 12(1), pages 67-88.
    • Handle: RePEc:brf:journl:v:12:y:2014:i:1:p:67-88
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    More about this item

    Keywords

    CAPM; portfolio management; cost of capital;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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