TY  - JOUR
AU  - MacKinlay,A. Craig
AU  - Pastor,Lubos
TI  - Asset Pricing Models:  Implications for Expected Returns and Portfolio Selection
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7162
PY  - 1999
Y2  - June 1999
UR  - http://www.nber.org/papers/w7162
L1  - http://www.nber.org/papers/w7162.pdf
N1  - Author contact info:
A. Craig MacKinlay
Department of Finance, Wharton School
University of Pennsylvania, Steinberg-Dietrich Hal
3620 Locust Walk
Philadelphia, PA  19104-6367
Tel: 215/898-5309
Fax: 215/898-6200
E-Mail: MACKINLAY@WHARTON.UPENN.EDU

Lubos Pastor
University of Chicago
Booth School of Business
5807 South Woodlawn Ave
Chicago, IL  60637
Tel: 773/834-4080
Fax: NA
E-Mail: lubos.pastor@chicagobooth.edu
AB  - Implications of factor-based asset pricing models for estimation of expected returns and for portfolio selection are investigated. In the presence of model mispricing due to a missing risk factor, the mispricing and the residual covariance matrix are linked together. Imposing a strong form of this link leads to expected return estimates that are more precise and more stable over time than unrestricted estimates. Optimal portfolio weights that incorporate the link when no factors are observable are proportional to expected return estimates, effectively using an identity matrix as a covariance matrix. The resulting portfolios perform well both in simulations and in out-of-sample comparisons.
ER  -