Understanding portfolio efficiency with conditioning information

We show that unconditionally efficient returns do not achieve the maximum unconditional Sharpe ratio, neither display zero unconditional Jensen’s alphas, when returns are predictable. Next, we define a new type of efficient returns that is characterized by those unconditional properties. We also study a different type of efficient returns that is rationalized by standard mean-variance preferences and motivates new Sharpe ratios and Jensen’s alphas. We revisit the testable implications of asset pricing models from the perspective of the three sets of efficient returns. We also revisit the empirical evidence on the conditional variants of the CAPM and the Fama-French model from a portfolio perspective.