Understanding portfolio efficiency with conditioning information
AbstractWe show that unconditionally efficient returns do not achieve the maximum unconditional Sharpe ratio, neither display zero unconditional Jensen’s alphas, when returns are predictable. Next, we define a new type of efficient returns that is characterized by those unconditional properties. We also study a different type of efficient returns that is rationalized by standard mean-variance preferences and motivates new Sharpe ratios and Jensen’s alphas. We revisit the testable implications of asset pricing models from the perspective of the three sets of efficient returns. We also revisit the empirical evidence on the conditional variants of the CAPM and the Fama-French model from a portfolio perspective.
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Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1146.
Date of creation: Jan 2009
Date of revision: Oct 2011
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Web page: http://www.econ.upf.edu/
Conditional CAPM; Dynamic portfolio strategies; Jensen's alpha; Mean-variance frontiers; Representing portfolios; Sharpe ratio;
Other versions of this item:
- Francisco Peñaranda, 2009. "Understanding Portfolio Efficiency with Conditioning Information," FMG Discussion Papers dp626, Financial Markets Group.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-07 (All new papers)
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