Benchmark Portfolio Inefficiency and Deviations from the Security Market Line
1986; Wiley; Volume: 41; Issue: 2 Linguagem: Inglês
10.2307/2328436
ISSN1540-6261
Autores Tópico(s)Economic theories and models
ResumoThe Journal of FinanceVolume 41, Issue 2 p. 295-312 Article Benchmark Portfolio Inefficiency and Deviations from the Security Market Line RICHARD C. GREEN, RICHARD C. GREENGraduate School of Industrial Administration, Carnegie-Mellon University. I have benefited from discussions with participants in workshops at Carnegie-Mellon, Minnesota, and Yale, and a session of the 1985 Western Finance Association Meetings. The comments of Scott Richard, Robert Haugen, Richard Roll, and two anonymous reviewers have been particularly useful. Any errors remain my own responsibility.Search for more papers by this author RICHARD C. GREEN, RICHARD C. GREENGraduate School of Industrial Administration, Carnegie-Mellon University. I have benefited from discussions with participants in workshops at Carnegie-Mellon, Minnesota, and Yale, and a session of the 1985 Western Finance Association Meetings. The comments of Scott Richard, Robert Haugen, Richard Roll, and two anonymous reviewers have been particularly useful. Any errors remain my own responsibility.Search for more papers by this author First published: June 1986 https://doi.org/10.1111/j.1540-6261.1986.tb05037.xCitations: 21 Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL ABSTRACT This paper theoretically evaluates the robustness of the Security Market Line relationship when the market proxy employed is not mean-variance efficient. The analysis focuses on the behavior of the "benchmark errors," the deviations of assets and portfolios from the Security Market Line. First, we characterize how the location of an asset in mean-variance space determines its benchmark error. Then the continuity properties of the benchmark errors are studied. The results indicate that the magnitudes of the errors exhibit continuous but not uniformly continuous behaviors. The relative rankings based on deviations from the Security Market Line, however, exhibit some severe discontinuities. In fact, these can be exactly reversed for two proxies arbitrarily close in mean-variance space. REFERENCES 1P. Dybvig and S. Ross. "The Analytics of Performance Measurement Using a Security Market Line." The Journal of Finance 40 (June 1985), 383– 400. 2R. G. Ibbotson and R. A. Sinquefield. Stocks, Bonds, Bills, and Inflation: The Past and the Future, The Financial Analysts Research Foundation, Monograph No. 15, Charlottesville, Virginia, 1982. 3S. Kandel. " A Note on the Geometry of the Maximum Likelihood Estimator of the Zero-Beta Return." Mimeo, University of Chicago, November 1983. 4H. M. Markowitz. Portfolio Selection. New Haven, CT: Yale University Press, 1959. 5R. C. Merton. "An Analytic Derivation of the Efficient Portfolio Frontier." Journal of Financial and Quantitative Analysis 7 (September 1972), 1851– 72. 6R. Roll. "A Critique of the Asset Pricing Theory's Tests. Part I: On Past and Potential Testability of the Theory." Journal of Financial Economics 4 (March 1977), 129– 76. 7R. Roll. "Ambiguity when Performance is Measured by the Securities Market Line." The Journal of Finance 33 (September 1978), 1051– 69. 8R. Roll. "Orthogonal Portfolios." Journal of Financial and Quantitative Analysis 15 (December 1980), 1005– 23. 9S. Ross. " Return, Risk and Arbitrage." In I. Friend and J. Bicksler (Eds.). Risk and Return in Finance. Cambridge, MA: Ballinger, 1976, 189– 218. 10J. Shanken. " Equilibrium, Factors, and Arbitrage Pricing." Mimeo, University of California at Berkeley, August 1984. Citing Literature Volume41, Issue2June 1986Pages 295-312 ReferencesRelatedInformation
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