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

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  • Marie Briere
  • Bastien Drut
  • Valérie Mignon
  • Kim Oosterlinck
  • Ariane Szafarz

Abstract

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.

Suggested Citation

  • Marie Briere & Bastien Drut & Valérie Mignon & Kim Oosterlinck & Ariane Szafarz, 2012. "Is the Market Portfolio Efficient? A New Test of Mean-Variance Efficiency when All Assets Are Risky," Working Papers CEB 12-003, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:2013/107868
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    Cited by:

    1. repec:eee:finana:v:55:y:2018:i:c:p:23-34 is not listed on IDEAS
    2. Marie Briere & Ariane Szafarz, 2018. "Factors and Sectors in Asset Allocation: Stronger Together?," Working Papers CEB 18-016, ULB -- Universite Libre de Bruxelles.
    3. Marie Brière & Valérie Mignon & Kim Oosterlinck & Ariane Szafarz, 2016. "Towards greater diversification in central bank reserves," Journal of Asset Management, Palgrave Macmillan, vol. 17(4), pages 295-312, July.
    4. Brière, Marie & Szafarz, Ariane, 2015. "Does Commercial Microfinance Belong to the Financial Sector? Lessons from the Stock Market," World Development, Elsevier, vol. 67(C), pages 110-125.
    5. repec:dau:papers:123456789/14039 is not listed on IDEAS
    6. repec:ibn:ijefaa:v:10:y:2018:i:4:p:154-170 is not listed on IDEAS
    7. Marie Briere & Ariane Szafarz, 2017. "Factor Investing: The Rocky Road from Long-Only to Long-Short," Working Papers CEB 17-013, ULB -- Universite Libre de Bruxelles.

    More about this item

    Keywords

    Efficient portfolio; mean-variance efficiency; efficiency test.;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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