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Short Sales Restrictions and Kinks on the Mean Variance Frontier
Author(s) -
DYBVIG PHILIP H.
Publication year - 1984
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1984.tb03871.x
Subject(s) - frontier , portfolio , variance (accounting) , efficient frontier , point (geometry) , economics , econometrics , set (abstract data type) , modern portfolio theory , financial economics , mathematics , computer science , geometry , geography , accounting , archaeology , programming language
With a short sales restriction, there may be switching points along the mean variance frontier corresponding to changes in the set of assets held. Traditional wisdom holds that each switching point corresponds to a kink, while Ross has claimed that kinks never occur. This paper shows that the truth lies between the two views, since the efficient frontier may or may not be kinked at a switching point. There is some indication that kinks are rare, since a kink corresponds to a portfolio in which all assets have the same expected return.