Portfolio Inefficiency and the Cross Section of Expected Returns

Posted: 10 May 2000

See all articles by Shmuel Kandel (deceased)

Shmuel Kandel (deceased)

Deceased

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Abstract

The Capital Asset Pricing Model implies (i) the market portfolio is efficient and (ii) expected returns are linearly related to betas. Many do not view these implications as separate, since either implies the other, but we demonstrate that either can hold nearly perfectly while the other fails grossly. 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 values and bear no relation to the index portfolio's mean variance location. That location does determine the outcome of a mean beta regression fitted by generalized least squares.

JEL Classification: G11

Suggested Citation

Kandel (deceased), Shmuel and Stambaugh, Robert F., Portfolio Inefficiency and the Cross Section of Expected Returns. JOURNAL OF FINANCE, Vol 50, No 1, March 1995. Available at SSRN: https://ssrn.com/abstract=5904

Robert F. Stambaugh (Contact Author)

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
University of Pennsylvania
Philadelphia, PA 19104-6367
United States
215-898-5734 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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