Efficient Portfolios
Abstract
Given two random realized returns on an investment, which is to be preferred? This is a fundamental problem in finance that has no definitive solution except in the case one investment always returns more than the other. In 1952 Markowitz and Roy introduced the following criterion for risk vs. return in portfolio selection: if two portfolios have the same expected realized return then prefer the one with smaller variance. An efficient portfolio has the least variance among all portfolios having the same expected realized return. The primary contribution of this short note is observation that the CAPM formula holds for realized returns as random variables, not just their expectations. This follows directly from writing down a mathematical model for one period investments.
 Publication:

arXiv eprints
 Pub Date:
 September 2020
 DOI:
 10.48550/arXiv.2009.10852
 arXiv:
 arXiv:2009.10852
 Bibcode:
 2020arXiv200910852L
 Keywords:

 Quantitative Finance  Portfolio Management