TY - JOUR
AU - Kandel,Shmuel
AU - Stambaugh,Robert F.
TI - Portfolio Inefficiency and the Cross-Section of Expected Returns
JF - National Bureau of Economic Research Working Paper Series
VL - No. 4702
PY - 1994
Y2 - April 1994
DO - 10.3386/w4702
UR - http://www.nber.org/papers/w4702
L1 - http://www.nber.org/papers/w4702.pdf
N1 - Author contact info:
Robert F. Stambaugh
Finance Department
The Wharton School
University of Pennsylvania
Philadelphia, PA 19104-6367
Tel: 215/898-5734
Fax: 215/898-6200
E-Mail: stambaugh@wharton.upenn.edu
AB - 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.
ER -