A Test of Mean-Variance Efficiency When Short Selling is Prohibited
20 Pages Posted: 2 Jun 1998
Date Written: May 1998
We develop a statistical test for examining whether a given portfolio is mean-variance efficient with reference to the mean-variance frontier generated using a set of primitive assets. The set of primitive assets may include the given portfolio.We allow for short-sale restrictions while generating the mean-variance frontier using the primitive assets. Our measure of inefficiency is the difference between the variance of the given portfolio and the variance of the mean-variance efficient portfolio that has the same mean as the given portfolio. We derive the asymptotic distribution of the estimated measure of mean-variance inefficiency.
JEL Classification: G12
Suggested Citation: Suggested Citation