@techreport{NBERw1051,
title = "Do Asset-Demand Functions Optimize over the Mean and Variance of Real Returns? A Six-Currency Test",
author = "Jeffrey A. Frankel and Charles Engel",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Working Paper Series",
number = "1051",
year = "1985",
month = "March",
URL = "http://www.nber.org/papers/w1051",
abstract = {International asset demands are functions of expected returns.Optimal portfolio theory tells us that the coefficients in this relationship depend on the variance-covariance matrix of real returns.But previous estimates of the optimal portfolio (1) assume expected returns constant and (2) are not set up to test the hypothesis of mean-variance optimization. We use maximum likelihood estimation to impose a constraint between the coefficients and the error variance-covariance matrix. For a portfolio of six currencies, we are able statistically to reject the constraint. Evidently investors are either not sophisticated enough to maximize a function of the mean and variance of end-of-period wealth, or else are too sophisticated to do so.},
}