Understanding Portfolio Efficiency with Conditioning Information
AbstractContrary to the classic framework of passive strategies, if investors exploit return predictability through active strategies then there is a tension between the mean-variance frontiers that drive empirical work and the mean-variance preferences that are used in finance theory. We show that standard preferences choose portfolios on a frontier that has not been studied in the literature, develop new betas and Sharpe ratios to construct portfolio efficiency tests, and highlight some concerns with current empirical work. An empirical application to active strategies on stock portfolios sorted by size and book-to-market confirms the relevance of our theoretical results.
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp626.
Date of creation: Jan 2009
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Other versions of this item:
- Francisco Peñaranda, 2009. "Understanding portfolio efficiency with conditioning information," Economics Working Papers 1146, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2011.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-05 (All new papers)
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