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Further Ambiguity When Performance Is Measured by the Security Market Line
Author(s) -
Grauer Robert R.
Publication year - 1991
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1991.tb00397.x
Subject(s) - ambiguity , portfolio , econometrics , variance (accounting) , point (geometry) , line (geometry) , economics , security analysis , modern portfolio theory , expected return , computer science , financial economics , mathematics , geometry , accounting , programming language
This paper employs the optimality conditions for expected utility and mean‐variance portfolio problems to examine the ambiguities associated with the security market line criterion both at a point in time and through time. At a point in time, we show that the security market line criterion can be irrelevant, even in meanvariance economies. In a multiperiod setting, we show that the analysis of performance based on portfolio choice is inconsistent with the analysis based on return generating models. Empirical work suggests that the inconsistency can lead to dramatically different estimates of a security's required return.