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Single Period Markowitz Portfolio Selection, Performance Gauging and Duality: A Variation on Luenberger’s Shortage Function

  • Walter Briec


    (JEREM, Université de Perpignan)

  • Kristiaan Kerstens


    (CNRS-LABORES (URA 362), Université Catholique de Lille,)

  • Jean Baptiste Lesourd


    (GREQAM, Centre de la Vieille Charité)

Markowitz portfolio theory (1952) has induced research into the efficiency of portfolio management. This paper studies existing nonparametric efficiency measurement approaches for single period portfolio selection from a theoretical perspective and generalises currently used efficiency measures into the full mean-variance space. Therefore, we introduce the efficiency improvement possibility function (a variation on the shortage function), study its axiomatic properties in the context of Markowitz efficient frontier, and establish a link to the indirect mean-variance utility function. This framework allows distinguishing between portfolio efficiency and allocative efficiency. Furthermore, it permits retrieving information about the revealed risk aversion of investors. The efficiency improvement possibility function thus provides a more general framework for gauging the efficiency of portfolio management using nonparametric frontier envelopment methods based on quadratic optimisation.

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Paper provided by Department of Business Economics, Universitat Autonoma de Barcelona in its series Working Paper with number 200203.

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Date of creation: Apr 2002
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Handle: RePEc:bbe:wpaper:200203
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