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On the Exclusion of Assets from Tests of the Mean Variance Efficiency of the Market Portfolio: An Extension

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ABSTRACT

This paper extends Kandel's [3] analysis of the testability of the mean-variance efficiency of a market index when the return on some component of the index is not perfectly observable. In addition to information about the mean and variance of the missing asset, considered by Kandel, we explore the usefulness of information about the beta of the missing asset on the observed sub-portfolio in an economy with a riskless asset. The results are somewhat more supportive of the notion that mean-variance efficiency is testable on a subset of the assets.

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