Differential Information and Performance Measurement Using a Security Market Line




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    • Yale School of Management. The authors are grateful to Michael Brennan, Gregory Connor, Mark Grinblatt, Jon Ingersoll, Paul Pfleiderer, and Richard Roll for helpful comments. The first author is grateful for support under the Batterymarch Fellowship Program, and the second author is grateful for support from the National Science Foundation. This paper and its companion paper (Dybvig and Ross [10]) evolved from Dybvig and Ross [9].


An uninformed observer using the tools of mean variance and security market line analysis to measure the performance of a portfolio manager who has superior information is unlikely to be able to make any reliable inferences. While some positive results of a very limited nature are possible, e.g., when there is a riskless asset or when information is restricted to be “security specific,” in general anything is possible. In particular, a manager with superior information can appear to the observer to be below or above the security market line and inside or outside of the mean-variance efficient frontier, and any combination of these is possible.