IDEAS home Printed from https://ideas.repec.org/a/rjr/romjef/vy2012i4p104-116.html
   My bibliography  Save this article

An Analytic Derivation of the Efficient Market Portfolio

Author

Listed:
  • Zion Guo

    () (Department of Business Education, College of Technology, National Changhua University of Education, 500, Changhua, Taiwan, R.O.C.)

  • Hsin-Yi Huang

    (C., Tel.: 886-4-7232105 ext.7344; Fax: 886-4-7211290, E-mail: zionguo@cc.ncue.edu.tw.)

Abstract

A 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.

Suggested Citation

  • Zion Guo & Hsin-Yi Huang, 2012. "An Analytic Derivation of the Efficient Market Portfolio," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 104-116, December.
  • Handle: RePEc:rjr:romjef:v::y:2012:i:4:p:104-116
    as

    Download full text from publisher

    File URL: http://www.ipe.ro/rjef/rjef4_12/rjef4_2012p104-116.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Soosung Hwang & Stephen Satchell, 2002. "Calculating the misspecification in beta from using a proxy for the market portfolio," Applied Financial Economics, Taylor & Francis Journals, pages 771-781.
    2. Ravi Jagannathan & Tongshu Ma, 2003. "Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps," Journal of Finance, American Finance Association, vol. 58(4), pages 1651-1684, August.
    3. Dybvig, Philip H & Ross, Stephen A, 1985. " The Analytics of Performance Measurement Using a Security Market Line," Journal of Finance, American Finance Association, vol. 40(2), pages 401-416, June.
    4. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," Review of Economic Studies, Oxford University Press, vol. 25(2), pages 65-86.
    5. Kandel, Shmuel & Stambaugh, Robert F., 1987. "On correlations and inferences about mean-variance efficiency," Journal of Financial Economics, Elsevier, vol. 18(1), pages 61-90, March.
    6. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    7. Soosung Hwang & Stephen Satchell, 2002. "Calculating the misspecification in beta from using a proxy for the market portfolio," Applied Financial Economics, Taylor & Francis Journals, pages 771-781.
    8. Roll, Richard, 1978. "Ambiguity when Performance is Measured by the Securities Market Line," Journal of Finance, American Finance Association, vol. 33(4), pages 1051-1069, September.
    9. Jobson, J. D. & Korkie, Bob, 1982. "Potential performance and tests of portfolio efficiency," Journal of Financial Economics, Elsevier, vol. 10(4), pages 433-466, December.
    10. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    11. Green, Richard C & Hollifield, Burton, 1992. " When Will Mean-Variance Efficient Portfolios Be Well Diversified?," Journal of Finance, American Finance Association, vol. 47(5), pages 1785-1809, December.
    12. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    13. Levy, Haim, 1983. "The Capital Asset Pricing Model: Theory and Empiricism," Economic Journal, Royal Economic Society, vol. 93(369), pages 145-165, March.
    14. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
    15. Green, Richard C, 1986. " Benchmark Portfolio Inefficiency and Deviations from the Security Market Line," Journal of Finance, American Finance Association, vol. 41(2), pages 295-312, June.
    16. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    17. MacKinlay, A Craig & Richardson, Matthew P, 1991. " Using Generalized Method of Moments to Test Mean-Variance Efficiency," Journal of Finance, American Finance Association, vol. 46(2), pages 511-527, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    asset allocation; two-fund separation; capital market line; HJB equation; dynamic programming setting;

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rjr:romjef:v::y:2012:i:4:p:104-116. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Corina Saman). General contact details of provider: http://edirc.repec.org/data/ipacaro.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.