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Portfolio Inefficiency and the Cross-Section of Expected Returns

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  • Kandel, Shmuel
  • Stambaugh, Robert F

Abstract

The capital asset pricing model implies that the market portfolio is efficient and expected returns are linearly related to betas. Many do not view these implications as separate, since either implies the other, but the authors demonstrate that either can hold nearly perfectly while the other fails grossly. If the index portfolio is inefficient, then the coefficient and R[squared] from an ordinary least squares regression of expected returns on betas can equal essentially any values and bear no relation to the index portfolio's mean-variance location. That location does determine the outcome of a mean-beta regression fitted by generalized least squares. Copyright 1995 by American Finance Association.

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  • Kandel, Shmuel & Stambaugh, Robert F, 1995. "Portfolio Inefficiency and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 157-184, March.
  • Handle: RePEc:bla:jfinan:v:50:y:1995:i:1:p:157-84
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    References listed on IDEAS

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    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Kandel, Shmuel & Stambaugh, Robert F, 1989. "A Mean-Variance Framework for Tests of Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 2(2), pages 125-156.
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    5. 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.
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    7. Shanken, Jay, 1985. "Multivariate tests of the zero-beta CAPM," Journal of Financial Economics, Elsevier, vol. 14(3), pages 327-348, September.
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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