The Market Portfolio May Be Mean/Variance Efficient after All

Posted: 17 May 2010

See all articles by Moshe Levy

Moshe Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Richard Roll

California Institute of Technology

Date Written: June 2010

Abstract

Numerous studies have examined the mean/variance efficiency of various market proxies by employing sample parameters and have concluded that these proxies are inefficient. These findings cast doubt about the capital asset pricing model (CAPM), one of the cornerstones of modern finance. This study adopts a reverse-engineering approach: given a particular market proxy, we find the minimal variations in sample parameters required to ensure that the proxy is mean/variance efficient. Surprisingly, slight variations in parameters, well within estimation error bounds, suffice to make the proxy efficient. Thus, many conventional market proxies could be perfectly consistent with the CAPM and useful for estimating expected returns.

Keywords: G110, G120

Suggested Citation

Levy, Moshe and Roll, Richard W., The Market Portfolio May Be Mean/Variance Efficient after All (June 2010). The Review of Financial Studies, Vol. 23, Issue 6, pp. 2464-2491, 2010, Available at SSRN: https://ssrn.com/abstract=1607511 or http://dx.doi.org/hhp119

Moshe Levy (Contact Author)

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

Richard W. Roll

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

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