Understanding Portfolio Efficiency with Conditioning Information

39 Pages Posted: 3 Jul 2009

See all articles by Francisco Penaranda

Francisco Penaranda

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: January 30, 2009

Abstract

Contrary to the classic framework of passive strategies, if investors exploit return predictability through active strategies then there is a tension between the mean-variance frontiers that drive empirical work and the mean-variance preferences that are used in finance theory. We show that standard preferences choose portfolios on a frontier that has not been studied in the literature, develop new betas and Sharpe ratios to construct portfolio efficiency tests, and highlight some concerns with current empirical work. An empirical application to active strategies on stock portfolios sorted by size and book-to-market confirms the relevance of our theoretical results.

Keywords: beta-pricing, dynamic portfolio strategies, Jensen’s alpha, mean-variance frontiers, sharpe ratios

JEL Classification: C12, G11, G12

Suggested Citation

Penaranda, Francisco, Understanding Portfolio Efficiency with Conditioning Information (January 30, 2009). Available at SSRN: https://ssrn.com/abstract=1427772 or http://dx.doi.org/10.2139/ssrn.1427772

Francisco Penaranda (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

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