Further Ambiguity When Performance Is Measured by the Security Market Line |
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| Authors: | Robert R. Grauer |
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| Affiliation: | Simon Fraser University, Burnaby, B.C., Canada V5A 1S6. Financial support from the Natural Science and Engineering Research Council of Canada and the Social Sciences and Humanities Research Council of Canada is gratefully acknowledged as is the research assistance of Shawn Killam, Jean-Marc Potier, and Frederick Shen. The paper was presented at the Western Finance Association meetings in Colorado Springs. The author tharks Pao Cheng, Phil Dybvig, Rick Green, John Heaney, John Herzog, and the referee for valuable comments, and is particularly indebted to Michael Best for many helpful discussions concerning this and their related research. Naturally he is responsible for the interpretation of the results and any errors. |
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| Abstract: | This paper employs the optimality conditions for expected utility and mean-variance portfolio problems to examine the ambiguities associated with the security market line criterion both at a point in time and through time. At a point in time, we show that the security market line criterion can be irrelevant, even in meanvariance economies. In a multiperiod setting, we show that the analysis of performance based on portfolio choice is inconsistent with the analysis based on return generating models. Empirical work suggests that the inconsistency can lead to dramatically different estimates of a security's required return. |
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