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Understanding Portfolio Efficiency with Conditioning Information

Published online by Cambridge University Press:  29 July 2016

Francisco Peñaranda
Francisco Peñaranda*
Affiliation:
francisco.penaranda@qc.cuny.edu, Queens College, City University of New York, Economics Department, Flushing, NY 11367.
*
*Corresponding author: francisco.penaranda@qc.cuny.edu
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Abstract

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I develop two new types of portfolio efficiency when returns are predictable. The first type maximizes the unconditional Sharpe ratio of excess returns and differs from unconditional efficiency unless the safe asset return is constant over time. The second type maximizes conditional mean-variance preferences and differs from unconditional efficiency unless, additionally, the maximum conditional Sharpe ratio is constant. Using stock data, I quantify and test their performance differences with respect to unconditionally and fixed-weight efficient returns. I also show the relevance of the two new portfolio strategies to test conditional asset pricing models.

Information

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 3 , June 2016, pp. 985 - 1011
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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