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The Cross-Section of Positively Weighted Portfolios

Author

Listed:
  • Niedermayer, Daniel

    (University of Basel)

  • Zimmermann, Heinz

    (University of Basel)

Abstract

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

Suggested Citation

  • Niedermayer, Daniel & Zimmermann, Heinz, 2007. "The Cross-Section of Positively Weighted Portfolios," Working papers 2007/15, Faculty of Business and Economics - University of Basel.
    • Handle: RePEc:bsl:wpaper:2007/15
    as

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    References listed on IDEAS

    as
    1. Robert R. Grauer, 1999. "On the Cross‐Sectional Relation between Expected Returns, Betas, and Size," Journal of Finance, American Finance Association, vol. 54(2), pages 773-789, April.
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    4. Kandel, Shmuel & Stambaugh, Robert F, 1995. "Portfolio Inefficiency and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 157-184, March.
    5. Sharpe, William F, 1991. "Capital Asset Prices with and without Negative Holdings," Journal of Finance, American Finance Association, vol. 46(2), pages 489-509, June.
    6. Roll, Richard & Ross, Stephen A, 1994. "On the Cross-sectional Relation between Expected Returns and Betas," Journal of Finance, American Finance Association, vol. 49(1), pages 101-121, March.
    Full references (including those not matched with items on IDEAS)

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