01699cam a22002297 4500001000600000003000500006005001700011008004100028100002400069245016400093260006600257490004100323500001600364520074500380530006101125538007201186538003601258700002001294710004201314830007601356856003701432w1051NBER20140424191959.0140424s1985 mau||||fs|||| 000 0 eng d1 aFrankel, Jeffrey A.10aDo Asset-Demand Functions Optimize over the Mean and Variance of Real Returns? A Six-Currency Testh[electronic resource] /cJeffrey A. Frankel, Charles Engel. aCambridge, Mass.bNational Bureau of Economic Researchc1985.1 aNBER working paper seriesvno. w1051 aMarch 1985.3 aInternational 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. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.1 aEngel, Charles.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w1051.4 uhttp://www.nber.org/papers/w1051