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https://hdl.handle.net/2440/89501
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Type: | Journal article |
Title: | Tangent portfolio weights without explicitly specified expected returns |
Author: | Glabadanidis, P. |
Citation: | The Journal of Asset Management, 2014; 15(3):177-190 |
Publisher: | Palgrave Macmillan |
Issue Date: | 2014 |
ISSN: | 1470-8272 1479-179X |
Statement of Responsibility: | Paskalis Glabadanidis |
Abstract: | In this article, I propose an extension of the Treynor–Black model to a case where the investor is not fully invested in the stock market at the outset and there is no need to explicitly specify securities’ expected returns. I derive explicit tangent portfolio weights based on a factor model of securities’ expected returns. The computational burden of the model is linear in the number of securities in the portfolio and does not involve any matrix inversion. I present an empirical application using the market model of Sharpe, the three-factor model of Fama and French and the four-factor model of Carhart with up to 30 industry portfolios between 1963 and 2012 and up to 1000 US stocks starting in 1992 until 2012. The portfolios perform well out-of-sample relative to the entire US value-weighted stock market portfolio with dividends reinvested from the Center for Research in Security Prices. The proposed framework can be extended in a straightforward way to time-varying factor models with multiple state variables affecting securities’ expected returns and factor loadings. |
Keywords: | tangent portfolio weights; factor models of expected returns; market model; Fama and French three-factor model; Carhart four-factor model; out-of-sample realized active return |
Rights: | © 2014 Macmillan Publishers Ltd |
DOI: | 10.1057/jam.2014.22 |
Published version: | http://www.palgrave-journals.com/jam/journal/v15/n3/abs/jam201422a.html |
Appears in Collections: | Aurora harvest 7 Business School publications |
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