IDEAS home Printed from https://ideas.repec.org/a/spr/rvmgts/v11y2017i4d10.1007_s11846-016-0205-0.html
   My bibliography  Save this article

Analysing the information embedded in the optimal mean–variance weights: CAPM versus Bamberg and Dorfleitner model

Author

Listed:
  • Maria-Teresa Bosch-Badia

    (Universitat de Girona)

  • Joan Montllor-Serrats

    (Universitat Autonoma de Barcelona)

  • Maria-Antonia Tarrazon-Rodon

    (Universitat Autonoma de Barcelona)

Abstract

This paper is centred on the analysis of the information embedded in the optimal weights of the assets in the CAPM and the Bamberg–Dorfleitner model. On this basis, first we find a functional relationship between the optimal weights of both models. Next, we find a set of performance indicators that express the contribution of each asset to the reward/volatility ratio measured as the Sharpe ratio or through a utility function. For the Bamberg–Dorfleitner model these indicators also lead to identify the contribution of each independent variable to the reward/volatility ratio. Technically, these connections are obtained through the covariance-normalized portfolio that consists of a transformation of the inverted covariance matrix. The additive property of covariances is transmitted to the indicators. These results enable investors and portfolio managers to obtain a precise knowledge of the causes of the value of the reward/volatility ratio. From the corporate point of view, this approach contributes to a better identification of the features of the different types of investors to whom to focus the corporate financial policy.

Suggested Citation

  • Maria-Teresa Bosch-Badia & Joan Montllor-Serrats & Maria-Antonia Tarrazon-Rodon, 2017. "Analysing the information embedded in the optimal mean–variance weights: CAPM versus Bamberg and Dorfleitner model," Review of Managerial Science, Springer, vol. 11(4), pages 789-814, October.
    • Handle: RePEc:spr:rvmgts:v:11:y:2017:i:4:d:10.1007_s11846-016-0205-0
    DOI: 10.1007/s11846-016-0205-0
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11846-016-0205-0
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11846-016-0205-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Back, Kerry, 2010. "Asset Pricing and Portfolio Choice Theory," OUP Catalogue, Oxford University Press, number 9780195380613.
    3. Lintner, John, 1969. "The Aggregation of Investor's Diverse Judgments and Preferences in Purely Competitive Security Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 4(4), pages 347-400, December.
    4. Levy,Haim, 2012. "The Capital Asset Pricing Model in the 21st Century," Cambridge Books, Cambridge University Press, number 9781107006713, September.
    5. Rubinstein, Mark E, 1973. "A Mean-Variance Synthesis of Corporate Financial Theory," Journal of Finance, American Finance Association, vol. 28(1), pages 167-181, March.
    6. Kourtis, Apostolos & Dotsis, George & Markellos, Raphael N., 2012. "Parameter uncertainty in portfolio selection: Shrinking the inverse covariance matrix," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2522-2531.
    7. Simon, Herbert A, 1978. "Rationality as Process and as Product of Thought," American Economic Review, American Economic Association, vol. 68(2), pages 1-16, May.
    8. Alexander, Gordon J. & Baptista, Alexandre M., 2002. "Economic implications of using a mean-VaR model for portfolio selection: A comparison with mean-variance analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1159-1193, July.
    9. repec:bla:jfinan:v:53:y:1998:i:5:p:1821-1827 is not listed on IDEAS
    10. Leland, Hayne E & Toft, Klaus Bjerre, 1996. "Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July.
    11. Epps, Thomas W., 1981. "Necessary and Sufficient Conditions for the Mean-Variance Portfolio Model With Constant Risk Aversion," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(2), pages 169-176, June.
    12. Shalit, Haim & Yitzhaki, Shlomo, 1984. "Mean-Gini, Portfolio Theory, and the Pricing of Risky Assets," Journal of Finance, American Finance Association, vol. 39(5), pages 1449-1468, December.
    13. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    14. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    15. Levy,Haim, 2012. "The Capital Asset Pricing Model in the 21st Century," Cambridge Books, Cambridge University Press, number 9780521186513, September.
    16. Moshe Levy & Richard Roll, 2010. "The Market Portfolio May Be Mean/Variance Efficient After All," The Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2464-2491, June.
    17. Simon, Herbert A, 1979. "Rational Decision Making in Business Organizations," American Economic Review, American Economic Association, vol. 69(4), pages 493-513, September.
    18. Merton, Robert C., 1972. "An Analytic Derivation of the Efficient Portfolio Frontier," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(4), pages 1851-1872, September.
    19. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    20. Kroll, Yoram & Levy, Haim & Markowitz, Harry M, 1984. "Mean-Variance versus Direct Utility Maximization," Journal of Finance, American Finance Association, vol. 39(1), pages 47-61, March.
    21. Eling, Martin & Schuhmacher, Frank, 2007. "Does the choice of performance measure influence the evaluation of hedge funds?," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2632-2647, September.
    22. Herbert A. Simon, 1978. "On How to Decide What to Do," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 494-507, Autumn.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Penaranda, Francisco, 2007. "Portfolio choice beyond the traditional approach," LSE Research Online Documents on Economics 24481, London School of Economics and Political Science, LSE Library.
    2. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    3. Schuhmacher, Frank & Auer, Benjamin R., 2014. "Sufficient conditions under which SSD- and MR-efficient sets are identical," European Journal of Operational Research, Elsevier, vol. 239(3), pages 756-763.
    4. Maria-Teresa Bosch-Badia & Joan Montllor-Serrats & Maria-Antonia Tarrazon-Rodon, 2017. "Analysing assets’ performance inside a portfolio: From crossed beta to the net risk premium ratio," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1270251-127, January.
    5. Javed Iqbal & Sara Azher, 2014. "Value-at-Risk and Expected Stock Returns: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 19(2), pages 71-100, July-Dec.
    6. Levy, Moshe & Levy, Haim, 2015. "Keeping up with the Joneses and optimal diversification," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 29-38.
    7. Gilles Boevi Koumou, 2020. "Diversification and portfolio theory: a review," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(3), pages 267-312, September.
    8. Giovanni Bonaccolto & Massimiliano Caporin & Sandra Paterlini, 2018. "Asset allocation strategies based on penalized quantile regression," Computational Management Science, Springer, vol. 15(1), pages 1-32, January.
    9. Tienyu Hwang & Simon Gao & Heather Owen, 2014. "Markowitz efficiency and size effect: evidence from the UK stock market," Review of Quantitative Finance and Accounting, Springer, vol. 43(4), pages 721-750, November.
    10. Trabelsi, Mohamed Ali, 2010. "Choix de portefeuille: comparaison des différentes stratégies [Portfolio selection: comparison of different strategies]," MPRA Paper 82946, University Library of Munich, Germany, revised 01 Dec 2010.
    11. Shahzad, Syed Jawad Hussain & Zakaria, Muhammad & Raza, Naveed, 2014. "Sensitivity Analysis of CAPM Estimates: Data Frequency and Time Frame," MPRA Paper 60110, University Library of Munich, Germany.
    12. Zura Kakushadze & Willie Yu, 2016. "Multifactor Risk Models and Heterotic CAPM," Papers 1602.04902, arXiv.org, revised Mar 2016.
    13. Frankfurter, George M. & Phillips, Herbert E., 1996. "Normative implications of equilibrium models: Homogeneous expectations and other artificialities," Journal of Economic Behavior & Organization, Elsevier, vol. 31(1), pages 67-83, October.
    14. Li Cai & Jinhua Cui & Hoje Jo, 2016. "Corporate Environmental Responsibility and Firm Risk," Journal of Business Ethics, Springer, vol. 139(3), pages 563-594, December.
    15. Vendrame, Vasco & Guermat, Cherif & Tucker, Jon, 2018. "A conditional regime switching CAPM," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 1-11.
    16. Rodrigues, Ana Flávia P. & Cavalcante, Charles C. & Crisóstomo, Vicente L., 2019. "A projection pricing model for non-Gaussian financial returns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 534(C).
    17. Balvers, Ronald J. & Huang, Dayong, 2009. "Evaluation of linear asset pricing models by implied portfolio performance," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1586-1596, September.
    18. John B. Guerard, 2024. "Sir David Hendry: An Appreciation from Wall Street and What Macroeconomics Got Right," Working Papers 2024-001, The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting, revised Feb 2024.
    19. Levy, Moshe & Ritov, Yaacov, 2001. "Portfolio Optimization with Many Assets: The Importance of Short-Selling," University of California at Los Angeles, Anderson Graduate School of Management qt41x4t67m, Anderson Graduate School of Management, UCLA.
    20. Haim Levy, 2010. "The CAPM is Alive and Well: A Review and Synthesis," European Financial Management, European Financial Management Association, vol. 16(1), pages 43-71, January.

    More about this item

    Keywords

    Portfolio optimisation; Inverse covariance matrix; Performance analysis;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:rvmgts:v:11:y:2017:i:4:d:10.1007_s11846-016-0205-0. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.