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Bayesian Inference and Portfolio Efficiency (Revised: 4-93)

Author

Listed:
  • Shmuel Kandel
  • Robert McCulloch
  • Robert H. Stambaugh

Abstract

Bayesian posterior distributions allow one to investigate the approximate efficiency of a portfolio without specifying the maximum degree of inefficiency a priori. The difference in expected returns between the value-weighted equity portfolio and an efficient portfolio of equal variance has a disperse posterior distribution, and our experiments confirm that such uncertainty is inherent in the sample sizes typically encountered in empirical studies. The maximum correlation between the value-weighted portfolio and an efficient portfolio has a posterior that is concentrated, often around low values, but this result appears to reflect nonlinearity in the function rather than information in the sample.

Suggested Citation

  • Shmuel Kandel & Robert McCulloch & Robert H. Stambaugh, "undated". "Bayesian Inference and Portfolio Efficiency (Revised: 4-93)," Rodney L. White Center for Financial Research Working Papers 8-91, Wharton School Rodney L. White Center for Financial Research.
    • Handle: RePEc:fth:pennfi:8-91
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