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Portfolio Inefficiency and the Cross‐section of Expected Returns
Author(s) -
KANDEL SHMUEL,
STAMBAUGH ROBERT F.
Publication year - 1995
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.1540-6261.1995.tb05170.x
Subject(s) - portfolio , inefficiency , econometrics , capital asset pricing model , economics , index (typography) , ordinary least squares , market portfolio , regression , mathematics , variance (accounting) , modern portfolio theory , portfolio optimization , statistics , financial economics , microeconomics , computer science , accounting , world wide web
The Capital Asset Pricing Model implies that (i) the market portfolio is efficient and (ii) expected returns are linearly related to betas. Many do not view these implications as separate, since either implies the other, but we demonstrate that either can hold nearly perfectly while the other fails grossly. If the index portfolio is inefficient, then the coefficients andR 2from an ordinary least squares regression of expected returns on betas can equal essentially any values and bear no relation to the index portfolio's mean‐variance location. That location does determine the outcome of a mean‐beta regression fitted by generalized least squares.