Portfolio Inefficiency and the Cross-Section of Expected Returns

  title={Portfolio Inefficiency and the Cross-Section of Expected Returns},
  author={Shmuel Kandel and R. Stambaugh},
  journal={NBER Working Paper Series},
The capital asset pricing model implies that the market portfolio is efficient and expected returns are linearly related to betas. Many do not view these implications as separate, since either implies the other, but the authors demonstrate that either can hold nearly perfectly while the other fails grossly. If the index portfolio is inefficient, then the coefficient and R[squared] from an ordinary least squares regression of expected returns on betas can equal essentially any values and bear no… Expand
The Conditional CAPM and the Cross-Section of Expected Returns
Most empirical studies of the static CAPM assume that betas remain constant over time and that the return on the value-weighted portfolio of all stocks is a proxy for the return on aggregate wealth.Expand
The Cross-Section of Positively Weighted Portfolios
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 simulationExpand
Expected profitability and the cross-section of stock returns
Abstract Both the investment CAPM and the dividend discount model posit that expected profitability should positively predict future stock returns in the cross section, all else equal. However,Expand
On the Cross-Sectional Relation between Expected Returns, Betas, and Size
In this paper, I set up scenarios where the mean-variance capital asset pricing model is true and where it is false. Then I investigate whether the coefficients from regressions of populationExpand
Asset Pricing Models and Economic Risk Premia: A Decomposition
The risk premia of linear factor models on economic (non-traded) risk factors can be decomposed into: i) the premium on maximum-correlation portfolios mimicking the factors; ii) (minus) theExpand
GDP Mimicking Portfolios and the Cross-Section of Stock Returns
The components of GDP (residential investment, durables, nondurables, equipment and software, and business structures) display a pronounced lead-lag structure. We investigate the implications of thisExpand
Another Look at the Cross-section of Expected Stock Returns
Our examination of the cross-section of expected returns reveals economically and statistically significant compensation (about 6 to 9 percent per annum) for beta risk when betas are estimated fromExpand
A Cross-Sectional Test of an Investment-Based Asset Pricing Model
I examine a factor pricing model for stock returns. The factors are returns on physical investment, inferred from investment data via a production function. I examine the model's ability to explainExpand
Idiosyncratic Risk and Security Returns
The traditional CAPM approach argues that only market risk should be incorporated into asset prices and command a risk premium. This result may not hold, however, if some investors can not hold theExpand
Industry-Specific Human Capital, Idiosyncratic Risk and the Cross-Section of Expected Stock Returns
Human capital is one of the largest assets in the economy and in theory it may play an important role for asset pricing. Human capital is heterogeneous across investors and one source ofExpand


The Cross‐Section of Expected Stock Returns
Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market 3, size, leverage, book-to-marketExpand
Multivariate proxies and asset pricing relations: Living with the Roll critique
Abstract A framework is developed in which inferences can be made about the validity of an equilibrium asset pricing relation, even though the central aggregate in this relation is unobservable. AExpand
On the Cross-sectional Relation between Expected Returns and Betas
There is an exact linear relation between expected returns and true "betas" when the market portfolio is on the ex ante mean-variance efficient frontier, but empirical research has found littleExpand
On correlations and inferences about mean-variance efficiency
A framework is presented for investigating the mean-variance efficiency of an unobservable portfolio based on its correlation with a proxy portfolio. A sensitivity analysis derives the highestExpand
A Test of the Efficiency of a Given Portfolio
A test for the ex ante efficiency of a given portfolio of assets is analyzed. The relevant statistic has a tractable small sample distribution. Its power function is derived and used to study theExpand
A Mean-Variance Framework for Tests of Asset Pricing Models
This article presents a mean-variance framework for likelihood- ratio tests of asset pricing models. A pricing model is tested by examining the position of one or more reference portfolios in sampleExpand
The CAPM is alive and well
In empirical studies of the CAPM, it is commonly assumed that, (a) the return to the value-weighted portfolio of all stocks is a reasonable proxy for the return on the market portfolio of all assetsExpand
Publisher Summary This chapter discusses the problem of selecting optimal security portfolios by risk-averse investors who have the alternative of investing in risk-free securities with a positiveExpand
Mimicking Portfolios and Exact Arbitrage Pricing
The authors characterize the sets of mimicking positions whose returns can serve in place of factors in an exact K-factor arbitrage pricing relation for a set of N assets. All of the sets areExpand
THE MEAN VARIANCE CAPITAL asset pricing model (CAPM) developed by Sharpe [5] and Lintner [3] has become a focal point for finance. Under conditions of perfection in competitive markets andExpand