Merging the State-Space Representation and the Mean-Variance Characterization of the Efficient Frontier

22 Pages Posted: 8 Aug 2005

See all articles by Karl Ludwig Keiber

Karl Ludwig Keiber

European University Viadrina Frankfurt (Oder) - Department of Economics

Date Written: May 2005

Abstract

In financial economics the classical mean-variance characterization and the orthogonal state-space representation of the efficient frontier coexist. In this paper we establish a link between these approaches to the efficient frontier. The two orthogonal payoffs which span the efficient frontier in the state-space and the two portfolios which allow to construct the efficient frontier in the classical mean-variance world are related to each other explicitly. Basically, a decomposition of the two orthogonal spanning payoffs in the state-space is provided. The results allow to switch between both approaches to the efficient frontier quickly and easily.

Keywords: Portfolio theory, efficient frontier, mean-variance, state-space, spanning

JEL Classification: G11, G12

Suggested Citation

Keiber, Karl Ludwig, Merging the State-Space Representation and the Mean-Variance Characterization of the Efficient Frontier (May 2005). Available at SSRN: https://ssrn.com/abstract=771286 or http://dx.doi.org/10.2139/ssrn.771286

Karl Ludwig Keiber (Contact Author)

European University Viadrina Frankfurt (Oder) - Department of Economics ( email )

Grosse Scharrnstr. 59
D-15230 Frankfurt (Oder)
Germany
+49-335-55342985 (Phone)
+49-335-55342357 (Fax)

HOME PAGE: http://www.wiwi.euv-frankfurt-o.de/keiber

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