Benchmark portfolio inefficiency and deviations from the security market line

Article Abstract:

Measuring investment performance, returns on investments, asset pricing and return on assets using the Security Market Line (SML) model is tested to determine whether the mean-beta space sensitivity of the SML model creates grossly misstated values, based on deviations from the SML. The research completed locates assets on mean-variance space continuums in order to identify benchmark errors, and analyzes the relative continuity of these benchmark error assignments. Upon analysis, it is shown that error magnitudes are somewhat continuous, but that this continuity is not uniform in its behavior. Consequently, it may be assumed by some that SML performance evaluations depend upon the selection of the proxy or benchmark, and its ability to accurately reflect the asset's valuation under changing market conditions.

Models, Securities, Investments, Valuation, Assets (Accounting)

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When will mean-variance efficient portfolios be well diversified?

Article Abstract:

We characterize the conditions under which efficient portfolios put small weights on individual assets. These conditions bound mean returns of average absolute covariability between assets. The bounds clarify the relationship between linear asset pricing models and well-diversified efficient portfolios. We argue that the extreme weightings in sample efficient portfolios are due to the dominance of a single factor in equity returns. This makes it easy to diversify on subsets to reduce factor risk simultaneously. The latter involves taking extreme positions. This behavior seems unlikely to be attributable to sampling error. (Reprinted by permission of the publisher.)

Evaluation, Stocks, Portfolio management

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Are there tax effects in the relative pricing of U.S. government bonds?

Article Abstract:

We investigate the impact of the Tax Reform Act of 1986 on the relative pricing of U.S Treasury bonds. We obtain positive statistically and economically significant estimates for the implicit tax rates of a "representative" investor in the late 1970s and early 1980s. After the 1986 Tax Reform, the point estimates for the tax rate are close to zero. Tests for a regime shift associated with the 1986 Tax Reform support the hypothesis that this event largely eliminated tax effects from the term structure. We discuss both institutional and statutory explanations for this change. (Reprinted by permission of the publisher.)

Prices and rates, Treasury securities, Tax rates

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