EconPapers    
Economics at your fingertips  
 

Reply to “(Im)Possible Frontiers: A Commentâ€

Thomas J. Brennan and Andrew W. Lo

Critical Finance Review, 2015, vol. 4, issue 1, 157-171

Abstract: In Brennan and Lo (2010), a mean-variance efficient frontier is defined as “impossible†if every portfolio on that frontier has negative weights, which is incompatible with the Capital Asset Pricing Model (CAPM) requirement that the market portfolio is mean-variance efficient. We prove that as the number of assets n grows, the probability that a randomly chosen frontier is impossible tends to one at a geometric rate, implying that the set of parameters for which the CAPM holds is extremely rare. Levy and Roll (2014) argue that while such “possible†frontiers are rare, they are ubiquitous. In this reply, we show that this is not the case; possible frontiers are not only rare, but they occupy an isolated region of mean-variance parameter space that becomes increasingly remote as n increases. Ingersoll (2014) observes that parameter restrictions can rule out impossible frontiers, but in many cases these restrictions contradict empirical fact and must be questioned rather than blindly imposed.

Keywords: CAPM; Mean-Variance Analysis; Portfolio Optimization; Roll Critique; Shortselling; Long/Short (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://dx.doi.org/10.1561/104.00000026 (application/xml)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000026

Access Statistics for this article

More articles in Critical Finance Review from now publishers
Bibliographic data for series maintained by Alet Heezemans ().

 
Page updated 2019-10-10
Handle: RePEc:now:jnlcfr:104.00000026