Understanding Portfolio Efficiency with Conditioning Information

Francisco Peñaranda ()
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Francisco Peñaranda: http://www.econ.upf.edu/en/people/onefaculty.php?id=p3433

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: 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.

Keywords: Beta-pricing; Dynamic portfolio strategies; Jensen’s alpha; Mean-variance frontiers; Sharpe ratios (search for similar items in EconPapers)
JEL-codes: C12 G11 G12 (search for similar items in EconPapers)
Date: 2009-01
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