An Analytic Derivation of the Efficient Market Portfolio
AbstractA market portfolio plays an important role in many financial theories and models. It is at the heart of the capital asset pricing model and other multivariate models. Because of the market portfolio cannot be observed directly, proxy portfolios must be used to conduct empirical studies. Unfortunately, many studies found these proxies to be inefficient and even removed from the efficient frontier. According to two-fund separation theorem, we take two steps to discover the efficient market portfolio. Our thinking is straightforward and proves that our market portfolio is not only an efficient portfolio but also is situated on the capital market line. Many researches have shown that the market portfolio is extremely sensitive to performance measurements. Hence, our findings may significantly influence financial research.
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Bibliographic InfoArticle provided by Institute for Economic Forecasting in its journal Romanian Journal for Economic Forecasting.
Volume (Year): (2012)
Issue (Month): 4 (December)
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More information through EDIRC
asset allocation; two-fund separation; capital market line; HJB equation; dynamic programming setting;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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