Portfolio performance, residual analysis and capital asset pricing model tests
By: Edward M. Rice, David Mayers
Contributors: Mayers, David, joint author; University of Illinois at Urbana-Champaign. College of Commerce and Business Administration
Series: Faculty working papers -- no. 539; Faculty working papers -- v no. 539.
Publisher: College of Commerce and Business Administration, University of Illinois at Urbana-Champaign
Published: 1979
Place of publication: [Urbana, Ill.]
Language: eng
Number of pages: 42
Description: "Recent work by Richard Roll has challenged the worth of portfolio performance measures based on the capital asset pricing model. This paper demonstrates that Roll's conclusions are due to his inappropriate use of a 'truly' ex-ante efficient index. Using a choice and information theoretic framework, an appropriate index is shown to be efficient relative to to the probabilities assessed by the 'market.' Residual analyses and portfolio performance tests, using such an index, yield meaningful results for a wide class of information structures. Roll's primary criticisms, however, relate to tests of the model itself. We argue that these criticisms are vastly overstated."
Notes: Includes bibliographical references (p. 41-42).