@techreport{NBERw4702,
title = "Portfolio Inefficiency and the Cross-Section of Expected Returns",
author = "Shmuel Kandel and Robert F. Stambaugh",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Working Paper Series",
number = "4702",
year = "1994",
month = "April",
doi = {10.3386/w4702},
URL = "http://www.nber.org/papers/w4702",
abstract = {A plot of expected returns versus betas obeys virtually no relation to an inefficient index portfolio's mean-variance location. If the index portfolio is inefficient, then the coefficients and R- squared from an ordinary-least-squares regression of expected returns on betas can equal essentially any desired values. The mean-variance location of the index does determine the properties of a cross- sectional mean-beta relation fitted by generalized least squares (GLS). As the index portfolio moves closer to exact efficiency, the GLS mean-beta relation moves closer to the exact linear relation corresponding to an efficient portfolio with the same variance. The goodness-of-fit for the GLS regression is the index portfolio's squared relative efficiency, which measures closeness to efficiency in mean-variance space.},
}