Portfolio Inefficiency and the Cross-Section of Expected Returns

Shmuel Kandel and Robert Stambaugh

No 4702, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A plot of expected returns versus betas obeys virtually no relation to an inefficient index portfolio's mean-variance location. If the index portfolio is inefficient, then the coefficients and R- squared from an ordinary-least-squares regression of expected returns on betas can equal essentially any desired values. The mean-variance location of the index does determine the properties of a cross- sectional mean-beta relation fitted by generalized least squares (GLS). As the index portfolio moves closer to exact efficiency, the GLS mean-beta relation moves closer to the exact linear relation corresponding to an efficient portfolio with the same variance. The goodness-of-fit for the GLS regression is the index portfolio's squared relative efficiency, which measures closeness to efficiency in mean-variance space.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 1994-04
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as Journal of Finance 50(1995):157-184.

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Journal Article: Portfolio Inefficiency and the Cross-Section of Expected Returns (1995)
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