Portfolio Optimization with Many Assets: The Importance of Short-Selling

Moshe Levy () and Yaacov Ritov

University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA

Abstract: We investigate the properties of mean-variance efficient portfolios when the number of assets is large. We show analytically and empirically that the proportion of assets held short converges to 50% as the number of assets grows, and the investment proportions are extreme, with several assets held in large positions. The cost of the no-shortselling constraint increases dramatically with the number of assets. For about 100 assets the Sharpe ratio can be more than doubled with the removal of this constraint. These results have profound implications for the theoretical validity of the CAPM, and for policy regarding short-selling limitations.

Keywords: portfolio optimization; short-selling; CAPM. (search for similar items in EconPapers)
Date: 2001-05-01
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Citations: View citations in EconPapers (4)

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