Efficient Portfolios and Superfluous Diversification

George M. Frankfurter and Thomas J. Frecka

Journal of Financial and Quantitative Analysis, 1979, vol. 14, issue 5, 925-938

Abstract: In this study, alternative real and simulated market indexes are examined as proxies for the “common factor” required by the Sharpe portfolio selection model [13]. The ex post performance of efficient and well-diversified portfolios generated by the model based on the different indexes is compared. The results indicate no significant difference in performance between real and simulated indexes, although the degree of diversification is much lower for portfolios based on indexes which relate well to the universe of securities. It is also shown that portfolios which are selected according to the Sharpe model (regardless of the index) outperform strategies which call for investing in the market portfolio.

Date: 1979
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