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On the nature of mean-variance spanning

Author

Listed:
  • Cheung, C. Sherman
  • Kwan, Clarence C.Y.
  • Mountain, Dean C.

Abstract

Asset spanning tests are very useful tools for the determination of which asset classes belong to an investor's portfolio. There are numerous applications of such tools in the finance literature. What is not so obvious is the proper decision an investor should make if the extra asset classes are spanned by some existing assets. Should the investor make a conscious decision not to invest in them as they add no value? Should the investor invest in them anyway as they do no harm? This study provides an analytical solution to the puzzle and also offers an economic rationale.

Suggested Citation

  • Cheung, C. Sherman & Kwan, Clarence C.Y. & Mountain, Dean C., 2009. "On the nature of mean-variance spanning," Finance Research Letters, Elsevier, vol. 6(2), pages 106-113, June.
    • Handle: RePEc:eee:finlet:v:6:y:2009:i:2:p:106-113
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    References listed on IDEAS

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    1. Huberman, Gur & Kandel, Shmuel, 1987. "Mean-Variance Spanning," Journal of Finance, American Finance Association, vol. 42(4), pages 873-888, September.
    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. Guy V. G. Stevens, 1998. "On the Inverse of the Covariance Matrix in Portfolio Analysis," Journal of Finance, American Finance Association, vol. 53(5), pages 1821-1827, October.
    4. Jobson, J. D. & Korkie, Bob, 1989. "A Performance Interpretation of Multivariate Tests of Asset Set Intersection, Spanning, and Mean-Variance Efficiency," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(2), pages 185-204, June.
    5. Nijman, T.E. & de Roon, F.A. & Werker, B.J.M., 2001. "Testing for Mean-Variance spanning with short sales constraints and transaction costs : The case of emerging markets," Other publications TiSEM f4a3551a-d7ae-4c22-8813-b, Tilburg University, School of Economics and Management.
    6. Frans A. De Roon & Theo E. Nijman & Bas J. M. Werker, 2001. "Testing for Mean‐Variance Spanning with Short Sales Constraints and Transaction Costs: The Case of Emerging Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 721-742, April.
    7. Bekaert, Geert & Urias, Michael S, 1996. "Diversification, Integration and Emerging Market Closed-End Funds," Journal of Finance, American Finance Association, vol. 51(3), pages 835-869, July.
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    Cited by:

    1. Wolfgang Bessler & Julian Holler & Philipp Kurmann, 2012. "Hedge funds and optimal asset allocation: Bayesian expectations and spanning tests," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 109-141, March.
    2. Mihir Dash, 2018. "Modelling the Efficient Frontier: An Empirical Study in the Indian Stock Market," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 7(2), pages 83-94, May.
    3. Sermin Gungor & Richard Luger, 2016. "Multivariate Tests of Mean-Variance Efficiency and Spanning With a Large Number of Assets and Time-Varying Covariances," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 34(2), pages 161-175, April.
    4. Chen, Hsuan-Chi & Ho, Keng-Yu, 2009. "Do IPO index portfolios improve the investment opportunities for mean-variance investors?," Finance Research Letters, Elsevier, vol. 6(3), pages 159-170, September.

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    Keywords

    Asset spanning Portfolio choice;

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