Capital asset pricing compatible with observed market value weights

Article Abstract:

The set of expected return vectors with an observed portfolio that is mean variance efficient is shown to be a two-parameter family, and ten ways to specify the time series behavior of the two parameters are identified, with the result highlighting several inconsistencies related to mean variance modeling. The inference of the time series of expected return vectors for each of the cases is allowed, as well as all other capital asset pricing model variables that are compatible with a known covariance matrix and the observed time series of market value weights. Substantial case-to-case differences are shown to exist in the time series of mean vectors, and several of them are shown to be considerably different from the constant mean vector resulting from tests of the capital asset pricing model.

Models, Testing, Capital investments, Time-series analysis, Time series analysis

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Gains from international diversification: 1968-85 returns on portfolios of stocks and bonds

Article Abstract:

This paper applies the multi-period investment model to a universe of international securities on the basis of the simple probability assessment approach. Our principal findings are: (1) the gains from including non-U.S. asset categories in the universe were remarkably large (in some cases statistically significant), especially for the highly risk-averse strategies, (2) the gains from removing the no leverage constraint were more substantial than they were in the absence of non-U.S. securities, and (3) there is strong evidence of market segmentation in that the optimal levels of investment in U.S. securities were mostly zero in the presence of the non-U.S. asset categories. (Reprinted by permission of the publisher.)

Analysis, Management, International aspects, Portfolio management, Securities, Financial research

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On the cross-sectional relation between expected returns, betas, and size

Article Abstract:

In this paper, I set up scenarios where the mean-variance capital asset pricing model is true and where it is false. Then I investigate whether the coefficients from regressions of population expected excess returns on population betas, and expected excess returns on betas and size, allow us to distinguish between the scenarios. I show that the coefficients from either ordinary least squares or generalized least squares regressions do not allow us to tell whether the model is true or false. (Reprinted by permission of the publisher.)

Return on investment, Rate of return, Least squares, Functions, Beta, Beta functions

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