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The Cross-Section of Positively Weighted Portfolios

29 Pages Posted: 4 Mar 2007  

Daniel Niedermayer

University of Basel

Heinz Zimmermann

University of Basel - Center for Economic Science (WWZ) - Department of Finance

Date Written: March 1, 2007

Abstract

This paper examines properties of mean-variance inefficient proxies with respect to producing a linear relation between expected returns and betas. The numerical results of a Monte Carlo simulation show that in the CAPM slightly inefficient, positively weighted proxies cause an almost perfect linear expected return - beta relation. Moreover, we show that a strong linearity among a predefined subset of assets exists. These implications are important for the interpretation of empirical tests as well as for asset pricing and for the improvement of proxies' benchmark properties. In contrast to current literature the results suggest that the CAPM's pricing error is small when slightly inefficient, positively weighted proxies are used.

Keywords: asset pricing, CAPM, Roll Critique, mean-variance analysis, short-sale constraint, market proxy

JEL Classification: G10, G11, G12

Suggested Citation

Niedermayer, Daniel and Zimmermann, Heinz, The Cross-Section of Positively Weighted Portfolios (March 1, 2007). Available at SSRN: https://ssrn.com/abstract=967986 or http://dx.doi.org/10.2139/ssrn.967986

Daniel Niedermayer (Contact Author)

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Heinz Zimmermann

University of Basel - Center for Economic Science (WWZ) - Department of Finance ( email )

Peter Merian Weg 6
Basel, 4002
Switzerland
+41 61 267 33 16 (Phone)
+41 61 267 08 98 (Fax)

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