Peñaranda, Francisco (2009) Understanding portfolio efficiency with conditioning information. Discussion paper, 626. Financial Markets Group, London School of Economics and Political Science, London, UK.
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Contrary to the classic framework of passive strategies, if investors exploit return predictability through active strategies then there is a tension between the mean-variance frontiers that drive empirical work and the mean-variance preferences that are used in finance theory. We show that standard preferences choose portfolios on a frontier that has not been studied in the literature, develop new betas and Sharpe ratios to construct portfolio efficiency tests, and highlight some concerns with current empirical work. An empirical application to active strategies on stock portfolios sorted by size and book-to-market confirms the relevance of our theoretical results.
|Item Type:||Monograph (Discussion Paper)|
|Additional Information:||© 2009 The Author|
|Library of Congress subject classification:||H Social Sciences > HF Commerce
H Social Sciences > HB Economic Theory
|Journal of Economic Literature Classification System:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C12 - Hypothesis Testing
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
|Sets:||Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
|Date Deposited:||10 Jul 2009 15:05|
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