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Is the Market Portfolio Mean–Variance Efficient?

In: HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING

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  • Robert Grauer

Abstract

This chapter investigates the characteristics of a subset of the infinite number of Security Market Lines (SMLs) that ensure the market portfolio is mean–variance efficient both at a point in time and over time. The analysis employs raw rather than excess returns. With some specifications of the SML, the risk-free rate exceeds the market portfolio’s equilibrium mean, which is inconsistent with CAPM theory. At a point in time, a Hotelling’s T2 test may reject most of the SMLs or none of them, although other mean–variance criteria may indicate some are economically reasonable and others are not.

Suggested Citation

  • Robert Grauer, 2020. "Is the Market Portfolio Mean–Variance Efficient?," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 47, pages 1763-1787, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811202391_0047
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    More about this item

    Keywords

    Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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