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Is the Market Portfolio Efficient? A New Test of Mean-Variance Efficiency when all Assets are Risky

  • Szafarz, Ariane
  • Oosterlinck, Kim
  • Mignon, Valérie
  • Drut, Bastien
  • Brière, Marie

The market portfolio efficiency remains controversial. This paper develops a new test of portfolio mean-variance efficiency relying on the realistic assumption that all assets are risky. The test is based on the vertical distance of a portfolio from the efficient frontier. Monte Carlo simulations show that our test outperforms the previous mean-variance efficiency tests for large samples since it produces smaller size distortions for comparable power. Our empirical application to the U.S. equity market highlights that the market portfolio is not mean-variance efficient, and so invalidates the zero-beta CAPM.

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File URL: http://basepub.dauphine.fr/xmlui/bitstream/123456789/9297/1/WP_EcoX_2011-20.pdf
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Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/9297.

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Date of creation: 2013
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Publication status: Published in Finance, 2013, Vol. 34, no. 1. pp. 7-41.Length: 34 pages
Handle: RePEc:dau:papers:123456789/9297
Contact details of provider: Web page: http://www.dauphine.fr/en/welcome.html

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