On the performance of efficient portfolios

Jan Wenzelburger () and Volker Boehm

No 197, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: This paper investigates the performance of efficient portfolios in a financial market with heterogeneous investors including rational traders, noise traders, and chartists. A generalization of the security market line result states that, regardless of the diversity of beliefs, the portfolios of rational investors with mean-variance preferences are mean-variance efficient in the sense of classical CAPM. We show that, depending on the noise traders' behavior, the performance of efficient portfolios when measured by empirical Sharpe ratios can be dominated. Empirical Sharpe ratios may thus be inappropriate indicators for efficient portfolios.

Keywords: CAPM; efficient portfolios; heterogeneity; asset markets (search for similar items in EconPapers)
JEL-codes: G11 O16 (search for similar items in EconPapers)
Date: 2004-08-11
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