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Mean-variance analysis and the Modified Market Portfolio

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  • Wenzelburger, Jan

Abstract

This article considers a financial market in which asset returns are stipulated by an exogenous stochastic process. It argues that the market portfolio should be replaced by a modified market portfolio which by construction is mean-variance efficient. All classical tenets of the CAPM are established without using any of its restrictive assumptions. A valuation formula and beta coefficients that capture the full cross sectional variability of the returns process are introduced, allowing for a distinction between systematic and non-systematic risk. It is shown that the modified market portfolio does, in general, not coincide with the traditional market portfolio.

Suggested Citation

  • Wenzelburger, Jan, 2020. "Mean-variance analysis and the Modified Market Portfolio," Journal of Economic Dynamics and Control, Elsevier, vol. 111(C).
    • Handle: RePEc:eee:dyncon:v:111:y:2020:i:c:s0165188919302167
    DOI: 10.1016/j.jedc.2019.103821
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    More about this item

    Keywords

    Market portfolio; Mean-variance analysis; Agent-based models; Heterogeneous beliefs; CAPM;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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