Short Selling and Efficient Sets



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    • Carlson School of Management, University of Minnesota. I would like to thank William F. Sharpe, the workshop participants at the University of Auckland, the University of Otago, the Hong Kong University of Science and Technology, and Michigan State University, and an anonymous referee for their helpful comments and the Institute for Financial Studies at the University of Minnesota for its financial support.


The effect of short selling on the composition and location of the efficient set has been analyzed in a variety of ways. However, the situation typically facing investors where the initial margin requirement is less than 100 percent and the riskfree interest rate that is paid on the short proceeds is less than the rate paid on initial margin has not previously been considered. The Elton-Gruber-Padberg algorithm (1976, 1978), subject to certain modifications, is shown here to be capable of identifying the efficient set under such conditions.