The QatarMy Review of I+konosnica ad Em, Vol. 95, No.

2, Sununer, 1995, pages 167406

Copyright0 1995 Trustees of the Unive~3tyof Illinois
An lights of repaY&lctionin anyfom lvserwd
ISSN 00955797

The Sensitivityin Tests of the Efficiency of a Portfolio

and Portfolio Performance Measurexnent

YOON K. CHOI
University of Texas-Dallas

A theoretical rationale and empirical evidence fm the sensitivity of the test of tk eflzciaq
of a given portfolio (ur the testof the CXPM zfapjmpiately designed) are provided. Stock
and bond data are emplyed as the ‘left hand side’ assets to show that a misspecification in
the ‘lzft-hand-side’ (or LHS) assets may cause tke sensitivity in testing tke ejjiciency of a
given ~f~io and the blurt in po~fo~o penance. Also, the results support the
use of art ‘asset ckzssfactor model in ~~~po~fo~o p~~an&e.

Gibbons, Ross, and Shanken (1989, GRS hereafter) examine the efficiency of a given
portfolio, recognizing its relevance to the CAPM test. Specifically, they consider the
sensitivity of the test with respect to the portfolio choice and the number of assets
used to determine the ex-post efficient frontier. They are concerned with the
statistical power of the test statistics in choosing an optimal number of assets, N and
number of observations, T.
This paper is concerned with a related but quite distinct issue regarding the
sensitivity in tests of the efficiency of a portfolio. Basically, the paper addresses the
issue of appropriate characteristics of the assets used to determine the ex-post
efficient frontier. Whether a portfolio is mean-variance efficient or not depends on
the kinds of assets against which the portfolio is evaluated. For example, a stock
portfolio (e.g., Equal-Weighted CRSP Index) may be efficient with respect to a set of
stocks, but the same portfolio may not be efficient with respect to a combined set of
stocks and bonds. Stambaugh (1982) illustrates this point convincingly in the context
of testing the CAPM.’
Therefore, in order to address the sensitivity issue unambiguously, a particular
class of assets are examined first with respect to the efficiency of a portfolio. The
particular class of assets we have in mind is the set of assets which are elements of the
portfolio whose efficiency is being examined.* Thus, a ‘misspeci~cation’ of the LHS
asset is said to occur when a researcher chooses some of the LHS assets 5~~s~~ethe
restricted class of assets3 When additional assets are added in the test, the sample

187
188 QUARTERLY REVIEW OF ECONOMICS AND FINANCE

mean-variance efficient frontier moves in general to the left in the mean-variance

space. As a result, the portfolio being evaluated becomes less efficient with the
additional assets. The magnitude of the impact of the misspecification depends on
the relative return/risk characteristics of the additional assets. The primary contri-
bution of this paper is to address this sensitivity in the test of the efficiency due to the
misspecification of the LHS assets which has been overlooked in the literature by
identifying the source and the direction of the sensitivity.
Recently, a surge of multivariate statistical approaches used to test the efficiency
of a portfolio (e.g., a market portfolio for the GAF’M test) since Gibbons (1982) and
Stambaugh (1982) whose test statistics are based on asymptotic distribution have
appeared.4 They employed the test statistics based on the asymptotic distributions
whose approximate small sample results are reported to be very sensitive to the
sample size and a particular test statistic used. Alternatively, GRS provide a multivari-
ate approach whose F-test statistics are based on small sample distribution, MacKinlay
(1985) shows by simulation that the multivariate Ftest employed here is robust to
deviations from the normality assumption of stock returns. This is one of the
advantages of Ftest statistics over the standard asymptotic test statistics when the
sample size is finite. Furthermore, empiricists usually examine subperiods and
aggregate the results for efftciency tests assuming constant parameters over these
subperiods. Gibbons and Shanken (1987) support this practice by showing that
aggregate power is substantially higher than that for a single subperiod.
Likewise, mean-variance efficiency tests based on conditional moments have
drawn much attention (e.g., Ferson, Kandel and Stambaugh 1987).5 Our approach
based on unconditional moments is thus limited in the sense that the estimation of
potentially time-varying parameters is not accounted for. However, the objective here
is to explain a source of the sensitivity in mean-variance efftciency tests, which is based
on economics of the mean-variance efficient frontier, not on a specific test statistic.
Thus, the argument for the sensitivity of test inferences advanced here applies to the
conditional moments approach as well as the unconditional moments approach that
is the focus of this paper. Furthermore, the conditional moments approach relies on
maximum likelihood estimation with normality assumption and a large sample size.
Thus, the conditional moments methods are subject to the finite sample bias
mentioned earlier.
Finally, our effort to match the class of the LHS assets with the portfolio in the
mean-variance efficiency test has an important implication for measuring portfolio
performance. Recently, Elton, Gruber, Das and Hlavka (1993) reported a bias in
measuring selectivity performance of a managed portfolio. The bias comes from
using an inappropriate performance benchmark. Their interesting empirical find-
ings are reevaluated in the context of the LHS asset misspecification considered
here.6 The ‘asset class factor model’ advocated by Sharpe (1988,1992) is also sup-
ported as a variant of multifactor models which reduces the LHS asset misspecifica-
tion problem.
 EFFICIENCY OF PORTFOLIO PERFORMANCE MEASUREMENT 189

In the next section, GRS test statistics are reviewed along with its geometric
interpretation. Second, we study the characteristics of the effect of the omitted LHS
assets on the effkiency test results. Third, the results of sensitivity analyses for the
misspecification are reported. Fourth, we discuss the implication of the LHS asset
misspecification for the portfolio performance measurement.

GRS’s MULTIV..TE TEST OF EFFICIENCY

Consider the following multivariate linear regression:

rit= sip + piprp,+

tzit i = l,...., N, (1)

where ri, = the excess return on asset i in period t;

% = the excess return on portfolio p whose efficiency is being examined;
Eit = the disturbance term for asset i in period t.

Assume that the disturbances are jointly normally distributed each period with mean
zero and nonsingular covariance matrix C, conditional on the excess returns for
portfolio p. The disturbances are also assumed to be independent over time and the
covariance matrix C is assumed to be nonsingular.
In order for a particular portfolio to be mean-variance efficient, the following
first-order condition must be satisfied for each of the given N assets:

Combining conditions in Equations 1 and 2 leads to the following null hypothesis:

H; c+=O, i=l,......., N. (3)

GRS employ “Hotelling’s T*” statistic to test the null hypothesis in Equation 3, given
the normality assumption. They also derive an equivalent F test based on the
noncentral Fdistribution, F= (T(T-N-l)/N(T2))W, with degrees of freedom N and
(TN-l) and

(4)
A
where C = unbiased residual covariance matrix; and dP is the ratio of ex-post average
excess return on portfolio p to its standard deviation (i.e., bP = rP/sP).
Finally, GRS show that the test statistic has a nice geometric interpretation as
follows:

dizF2-l=@U=+,
I
$*2 _ g2

(5)
w= 4-q P
[
190 QUARTERLY REVIEW OF ECONOMICS AND FINANCE

where & is the ex post price of risk (i.e., the maximum excess sample mean return
per unit of sample standard deviation). Fr/\om
the,mFimization problem in deriving
the minimum variance set, they show that Cl**= 3 V’r, where iz = fit.,,7; ). rp is defined
earlier; F,, is a column vector of mean excess returns on the original N assets included
in the portfolio p. V is the variance-covariance matrix of N + 1 assets including the
portfolio. Relationship given in Equation 5 impliy that I$* should be close to one
under the null hypothesis. GRS have shown that 0” turns out to be the maximum
slope of the tangent line fro? the origin in mean-standard deviation space. The null
hypothesis is rejected when 8* is sufftciently greater than 6, because the return/risk
ratio for portfolio p is much lower than the ex-post frontier return/risk ratio.

AN EFFICIENCYTESTAND OMITTED ASSETS IN A PORTFOLIO

The CAPM can be derived either by solving an expected utility maximization problem
or by solving the variance minimization problem under a normality of asset return
assumption. In the maximization (or minimization) problem for efficiency, it is
implicitly assumed that a security i (a LHS asset) is one component of the efficient
portfolio. Therefore, the risk/expected return linear relationship only applies to the
security within the efficient portfolio. This is why the valid test of the CAPM is whether
the true market portfolio is ex-ante mean variance efficient or not (See Roll 1977 for
the mathematics of the efficient frontier).
At a theoretical level, the point mentioned above does not carry any importance
at all simply because in the CAPM, the market portfolio, by definition, includes all
marketable assets in the economy. However, this point plays an important role when
we consider using a market proxy for testing the model. To be more general, we
consider the efficiency test of a portfolio following the GRS approach. Of course, to
the extent that the portfolio is a good proxy for the market, this test becomes a test
of the CAPM. Again, to avoid potential confusion, we consider as a benchmark the
situation where the LHS assets used in the efficiency test are the elements of the
portfolio being examined for its mean-variance efficiency.
Suppose that there is a portfolio, p, which consists of N assets, the benchmark
case. Furthermore, suppose that there are K assets available in addition. Let 8: =
7: klTO; 8f = ?i k’,, where 7: = (Tt,,7; , -’rk ) and 7,’ = (Tt,,;I,’ ) ; Tp is defined earlier;
7” is a column vector of mean excess return on the original N assets included in the
portfolio p; and Tk is a column vector of mean excess return on the K assets omitted
from the portfolio P, V,,is the variance-covariance matrix of N + K+ 1 assets including
the omitted assets and the portfolio and Vais the variance-covariance matrix of N +
1 assets without the K assets. Then, 6: and 6: can be very different from each other,
depending upon the nature of the omitted assets, K, in the efftciency test, as shown
by Proposition 1.
 Proposition 1: Given the variables defined above, consider two efficient frontiers: one
with all original assets (i.e., N assets) which are elements of a portfolio whose mean-vari-
ance efficiency is being tested and the other with additional assets omitted in theportfolio
as well as with the original assets (i.e., N+K assets). The condition that these two different
frontiers become iokntical in terms of the maximum tangent slope is:

wherevaak 2sa covariance matrix of the omitted and included assets.

PROOF: See Appendix.

Proposition 1 suggests that statistical test inference depends on the relative

characteristics of the omitted assets in comparison with that of the original assets in
the test. The condition derived in Proposition 1 will be closely met when the return
and risk characteristics of the omitted assets are very similar to the included assets in
the test. Therefore, a potentially serious problem in testing arises when a researcher
adds the assets that have very different risk/return characteristics in comparison with
the original assets. A plausible example would be a situation where the portfolio p is
a market index including stocks only, but a bond portfolio as well as stocks is employed
in testing the efficiency of the portfolio p. A more interesting question is how
significantly the misspecification affects the test inference, as examined in the next
section.
It is important to recognize that the result of Proposition 1 is not the same as
mean-variance spanning results in Huberman and Kandel (1987). They examine
whether K derived assets/portfolios can span the N+K original assets. Therefore, K
portfolios they consider are a set of a linear combination of the N+K original assets.
However, in our paper, K assets are ‘the omitted assets’ which are neither part of nor
derived from the original N assets; that is, we consider a different investment
opportunity set. We derived a condition when the effect of the omitted asset in
generating the minimum variance frontier is eliminated in Proposition 1.
The result in Proposition 1 is also conceptually related to the bias in testing the
Arbitrage Pricing Theory mentioned in Dybvig and Ross (1985). For example,
assume that there is a factor, called land value, which occurs in only one asset, say,
real estate. Suppose we use stocks and a real estate index in order to test the APT
When stocks do not include the land value factor, the real estate index will appear
not to conform to the APT because the land value factor variance in the real estate
index will be mistakenly identified as idiosyncratic variance. In the factor model
context, the condition in Proposition 1 is a way to check the consistency of the factor
structure between the stocks and real estate index. Let us say rk is the return of the
real estate index and ra is the vector of stock returns. Since the real estate index has
its own factor independent of stocks factor, the condition is not met and thus the bias
192 QUARTERLY REVIEW OF ECONOMICS AND FINANCE

will lead to the rejection of the APT if the real estate is used with the stocks in a
pooling sample.7

SENSITIVITY ANALYSIS

Stambaugh (1982) studies how tests of the CAPM are sensitive to different sets of
asset returns. He finds that the result of the test is more sensitive to the selection of
the LHS assets than to the composition of the market index and maintains that this
sensitivity with respect to the choice of the LHS assets is quite frequent in other asset
pricing relations too.
A clue to the sensitivity of Stambaugh’s results can be traced to Proposition 1.
Proposition 1 shows that the return/risk characteristics of the omitted assets in testing
the efficiency of a given portfolio may affect the test inference. It is important to
recognize that the test statistic changes because the sample efficient frontier is
affected by the LHS asset misspecification in a&it&z to the change in sample size.
While GRS focus on the effect of the sample size, N and T, we will concentrate on the
effect of the LHS asset misspecification, given a sample size.’
We follow the GRS procedure to form 10 stock portfolios as the LHS portfolios
for the period 1931 to 1985. We select this particular period so as to compare our
results with earlier studies by GRS and Elton et al. First of all, for a consistency check
in our data, we use a data set similar to the one used by Black, Jensen and Scholes
(19’72) and show in Table 1 summary statistics on the 10 beta-sorted portfolios from
January 1931 through December 1965, which are very consistent with the GRS result.
In each portfolio, additional asset (the Ibbotson-Sinquefield long-term corporate
bond index or the long-term government bond index) is added as a part of the LHS

Tabb 1. SUMMARY STATISTICS ON BETA-SORTED PORTFOLIOS BASED

ON MONTHLY DATA, 1931-65(T = 420)
Portfolio
s(o\p) @IpI
number
-0.0020 0.0018 1.51 0.020 0.93
2 -0.002 1 0.0010 1.38 0.011 0.97
3 -0.0015 0.0009 1.23 0.010 0.97
4 -0.0004 0.0007 1.19 0.008 0.98
5 -0.0010 0.0008 1.08 0.009 0.97
6 0.0004 0.0008 0.93 0.008 0.97
7 0.0010 0.0008 0.87 0.009 0.96
8 0.0004 0.0008 0.75 0.009 0.95
9 0.001 I 0.0010 0.65 0.011 0.89
10 0.0013 0.0009 0.53 0.010 0.87
 EFFICIENCY OF fORTFOLIO P~O~CE M~~~E~ 193

7’ubk 2. EFFICIENT SLOPES FOR EFFICIENT FXONTIERS WlTH THE 10

BETA-SORTED STOCK PORTFOLIOS IN THE PERIOD FROM 1931 to 1985
Time Period(T) 0: Gc @:, 0; w, WC w,

1931-1940(120) 0.137 0.220 0.214 0.017 0.118 0.20* 0.194*

1941-1950(120) 0.173 0.244 0.198 0.095 0.071 0.136 0.094
1951-1960(120) 0.337 0.363 0.354 0.095 0.221” 0.245* 0.237*
1961-1970(120) 0.168 0.190 0.197 0.018 0.147 0.169** 0.176**
1$71-1980( 120) 0.046 0.055 0.056 0.012 0.033 0.042 0.043
198 l-1985 (60) 0.424 0.430 0.441 0.027 0.387** 0.392** 0.403**

assets in turn in order to examine how these extra assets affect the maximum slope
and thus the test of efficiency. This exercise will shed some light on the implications
of Proposition 1.
Table 2 illustrates the impact of the LHS asset misspeci~cation on the test of
efficiency. The influence of the misspeci~cation is reIlected in the slope estimates
obtained by including the omitted assets, corporate bonds and government bonds,
in constructing the ex-post efficient frontiers. Adding these assets unambiguously
increases the squared slope estimates throughout the sample period, 1931 to 1985.
When a corporate bond portfolio is added in constructing an efficient frontier, the
squared slope increases substantially especially in the periods 1931 to 1940 and 1941
to 1950, for example, from 0.137 to 0.22 and from 0.173 to 0.244, respectively. For
the period 1931-1940, the efftciency of the CRSP Equal-Weighted Index is not
rejected when the 10 beta-sorted stock portfolios (W = 0.118) are used, but the same
Index is rejected for its efficiency with the W statistic of 0.20 which is significant at
the 1% level when another asset is added, for example, a corporate bond or
government bond. Although there is a sharp increase in the W values in the period
1941-50, it is not sufficiently large to reject the efficiency of the CRSPEqual-Weighted
Index. We have another reversal of inference for the period 1961-70; the W value
changes from 0.147 to 0.169, which is significant at the 5% level.g
Now, we examine the return/risk characteristic ofeach omitted asset, a long-term
corporate and govermnent bond, in order to understand the magnitude of the
sensitivity. Before 1960, the impact of the long-term corporate bond is greater than
the government bond, while that relationship is reversed after 1960. Table 3 contains
the information about the return/risk characteristics of the corporate and govern-
ment bond relative to the CRSP index and the original assets. The risk/return
differential (DIFF), Ti-Vi;;, @ar,, measures the degree of the impact. The larger the
absolute value of the differential, the larger the impact will be. Of course, to be exact,
194 QUARTERLY REYIEW OF ECONOMICS AND FINANCE

Table 3. THE BETUBN/BISK CHABACTEKISTIC OF

THE LT CORPORATE AND GOVERNMENT BOND
DJPP
DIFFLT LT government
Time Period(T) corporate bond bond
1931-1940(120) 0.438 0.448
1941-1950(120) 0.160 0.132
1951-1960(120) -0.209 -0.191
1961-1970(120) -0.223 -0.339
1971-1980(120) -0.209 -0.239
1981-1985 (60) -0.118 -0.117

Nolts: DIFF measures the degree of similarity of the omiuwd assetsrelative to the original assets.
The numbers are in percenrage.
DIFF = rk - VA%%,. where rk is the mean excess return on the either LT corporate bond
or LT government bond. r, is the mean excess return vector on the original assets (the 10
stock portfolios and the market proxy). V&and V, are the covatince and variance for the
aset re~~nns denoted in the a~bsc~ipt.

the differential is to be ‘divided’ (or weighted) by a variance factor of the omitted

asset (i.e., the F matrix).
Indeed, Table 3 shows that the absolute values of the differential are larger
(smaller) for the corporate bond index before (after) 1960 except for the periods
1931-1940 and 1981-1985. For example, the absolute value of DIFF is 0.438% for
the LT corporate bond and 0.448% for the LT government bond in the period
1931-1940, while those are 0.118% and 0.117% for the LT corporate and the LT
government bond, respectively, in the period 1981-1985. This can be explained by
the fact that the exact impact of the omitted assets on the maximum slope (or the W
statistics) is obtained by dividing DIFF by the weighted variance and covariance of
the assets (i.e., Vkk -V&+$,& I n f ac t , m
* the 1931-1940 period, the variance of the
LT government bond’s excess return was only slightly higher with 0.027% than the
LT corporate bond with 0.023%. However, the covariances (with the 10 stock
portfolios and the equal weighted index) of the LT corporate bond were two or three
times larger than those of the LT government bond. The exception in the period
1981-1985 can be also explained similarly. DIFFs are almost the same for both
omitted assets in this period. However, the correlations between the LT government
bond and the original assets are slightly higher in most cases than those of the LT
corporate bond for this period, while the variances are almost identical. Therefore,
we conclude that the return/risk characteristics of the omitted LHS assets explain
the sensitivity of the test inference in addition tojust the number of the LHS assets.
And since the return/risk characteristics change over time, the sensitivity in the test
of efficiency also changes even if the omitted assets are the same.
Finally, we construct a new composite index by equally weighing the CUSP index
and the long-term corporate bond (and long-term government bond) and show the
Table4. EFFICIENCY SLOPES FOR EFFICIENT FRONTIERS WITH THE 10
BETASORTED STOCK PORTFOLIOS IN THE PERIOD FROM 1931to 1985

1931-1940(120) 0.017 0.025 0.023 0.190* 0.187*

1941-1950(120) 0.095 0.113 0.108 0.118 0.081
1951-1960(120) 0.095 0.074 0.079 0.269* 0.255*
1961-1970(120) 0.018 0.008 0.006 0.181* 0.190*
1971-1980(120) 0.012 0.005 0.004 0.050 0.052
1981-1985(60) 0.027 0.036 0.031 0.380** 0.398**

No&: The resulu are based on the regression model: q, = c$, + f$rl,, + Q V i = 1, , N and Vt = 1, , T. A new composite portfolio p
is obtained w combining the CRSP Equal-Weighted Indrx and the corporate (iu squared return/risk slope. ep) and gwemment
long-term bond index (its squared return/risk slope, e’$. c3; is from Table 2.
*Significant at the 1% level.
**Significant at the 5% level.

W-statistic in 4. This confirms Stambaugh’s that the of

efficiency insensitive to choices of market proxy. each sub-period,
statistics WC Wp are the same, in the test inference.

IMPLICATION FOR PERFORMANCE MEASURE OF MANAGED

PORTFOLIOS

Since the Jensen’s alpha measuring portfolio performance is closely related to the
GRS statistic reviewed earlier, there may be important implications of the LHS asset
misspecification for performance measurement. In fact, the null hypothesis given in
Equation 3 can be restated in a univariate test and interpreted as no abnormal
performance. Then Proposition 1 directly applies to the case of portfolio perform-
ance measurement. The multivariate test discussed in second section of this paper is
particularly appropriate in measuring the sizc~basedportfolios because the residuals
are highly correlated in size-sorted portfolios and this correlation may inject a bias
in estimating alpha.” This observation is particularly useful in evaluating mutual
funds performance because size is a major classification of many mutual funds (e.g.,
small aggressive stock funds) .ll
Elton et al. (1993; EGDH hereafter) point out a bias in measuring performance
due to an inappropriate benchmark. They argue that the S&P 500 index as a
benchmark portfolio is correctwhen measuring the performance of a portfolio which
consists of the S&P 500 stocks (e.g., long-term growth stock funds). However, the S&P
500 Index is not an appropriate benchmark for small-stock funds, bond funds or
international funds, for example, because many of these funds are not part of the
S&P 500 stocks. The above argument is exactly the same point advanced in the
196 QUARTERLY REVIEW OF ECONOMICS AND FINANCE

previous sections. Again, the magnitude and direction of the bias depends on the
risk/return characteristics of the omitted assets relative to the benchmark used.

The Omitted Assets Bias

EGDH show that the size of alpha systematically depends on the influence of the
non-S&P stocks which are small capitalization stocks (see Table 1 and Table 2 in their
paper). That is, the size of alpha is the largest for the stocks in the smallest decile
with negative signs in the Jensen period 1945-64. Ippolito (1989) shows exactly the
same pattern except that the sign of alpha is the opposite in his sample period
1965-84. However, they do not fully explain how the small stocks affect the alphas in
those two periods. In this section, we examine the small stocks behavior in the two
periods and explain their differential impacts on the alphas in the context of
Proposition 1. Due to the significant correlations among portfolios in the residuals,
we employ the GRS multivariate statistics, instead of focusing on the Jensen alpha in
the following discussion of abnormal performance of various portfolios.12
The following proposition provides a statistic to measure the significance of the
performance bias due to the omitted LHS assets.
Proposition 2. 8: and 8: be the maximum slope of the tangent line from the origin for
the efficient fronti wit+ all /\as>etsRnd with assets excluding the ‘omitted’ assets,
respectively. Then, 0;’ - 0:’ = a F ‘cx~, wherea is the intercept estimate in the multiple
regression and &= VkL
- Vu;h’bclk.

PROOF. See Appendix.

From Proposition 2, we o$serve t$at there,,are two components that potentially

affect the difference between 8G2and O,, where 8, is the ratio of ex-post average excess
return on portfolio p to its standard deviation (i.e., 4, = ‘p/Q. The portfolio it)is the
kenchmart p,orplio/\ag:iyt which performanze is being measured. Algebraically,
Cl:* - 6; = C$ C-‘C+, + CC;F’a,. As noted before, a,, is the intercept term in the simple
regression, obtained by regressing each individual portfolio which is pa;t of the
benchmark portfolio, p, on the particular benchmark portfolio, p, and a, is the
intercept estimate obtained by regressing each individual omitted asset on the set of
portfolios employed to determine the efficient set. It turns out that the variable
studied previously, DIFF, is equivalent to &,.
Now, in order to be consistent with EGDH’s study, we transform the excess
monthly return data into the excess annual returns simply by adding up 12 excess
monthly returns each year.13 We run the simple regression using the excess annual
returns and find that the magnitude and the sign of the Jensen alphas are almost
identical with those in EGDH’s results (see Panel A ofTable 5). EGDH attribute these
results to the bias resulting from omitting small stocks in constructing the benchmark
portfolio (e.g., the S&P500 index used here). Based on the result of Proposition 2,
 EFFICIENCY OF PORTFOLIO PERFORMANCE MEA!WREMENT 197

Table 5. THE ALPHA ESTIMATES BY ALTERNATIVE GROUP

Panel A: The alpha estimates by size deck
1945-1964 1965-1984
Decile by size Jensen Period Ippolito Period

Largest 0.26 -1.02

2 1.12 1.35
3 -1.74 3.65*
4 -1.71 4.60*
5 -3.00 5.64*
6 -3.32 7.19*
7 -4.58 9.13*
8 -3.08 9.29*
9 -I.04 10.80’
10 -4.88 12.84*

h’olp. (I) NI alphas at-e olxainrrl hg regressing the annual PXCCSS wfurn on rach decilr agamst S&P500 index. I‘hey are expressed in
percenGtgl?.

(2) *~l.i~lue 1s gleam than 2.0.

Panel B: CX~by size decile

1945-1964 1965-1984
Decile by size Jensen Period Ippolito Period

6 -1.91 1.51
7 -0.37 1.93
8 -1.10 1.54*
9 -0.48 2.84*
10 1.95 2.31

we estimate the variable, DIFF, which is the alpha estimate obtained by regressing
each of the omitted LHS portfolios on the included portfolios in the S&P500 index.
As shown in Panel B of Table V, aq’s are negative and insignificant in the Jensen
period, while they are positive and weakly significant in the Ippolito period. This
confirms EGDH’s claim that the omitted assets, small stocks here, inject a bias in
estimating the Jensen alpha especially for the Ippolito’s period. The risk/return
characteristic of the stock portfolio is quite contrasting for the two periods. In the
Jensen period, there was little difference in the mean annual excess returns between
the small and large stock portfolio returns: the mean annual excess return on S&P500
was 14.4%, while the mean excess return on the smallest stock portfolio was 17.8%.
However, the small stock’s performance compared to the S&P500 index was impres-
sive in the period of Ippolito (1965-84): the S&P5OO’s mean annual excess return
was only 1.9%, while the return on the smallest stock portfolio was as much as 16%.
This stark performance in the small stock portfolio explains the significant alpha
values in the Ippolito period.
198 QUARTERLY REVIEW OF ECONOMICS AND FINANCE

Tabb 6. MAXIMUM SQUARED SLOPE BY DIFFERENT NUMBER OF

PORTFOLIOS

S&P index VW index

Portfolios 1945-64 1965-84 1945-64 1965-84

&3) 0.558 0.297 0.623 0.296

&4) 0.561 0.304 0.720 0.307
G(5) 0.675 0.304 0.732 0.317
&6) 0.749 0.368 0.745 0.420
&7, 0.784 0.467 0.752 0.544
&S) 0.785 0.484 0.752 0.552
&9) 0.790 0.499 0.780 0.592
&lO) 0.795 0.527 0.780 0.602
6: 0.637 0.013 0.601 0.019

Nofr: VI%’is the CR9 value-weighted index. t$ is the squared slope (return/risk) of the market index. Excess annual returns are used in
thr table.
05 (i) is the maximum squared slope of rbe elfcienr frontier with die i largest siresorted portfolios.

Table 6 showsjhat the effect of the small stock portfolio on the maximum squared
slope parameter, 6z2. If only the large stock portfolios are used to test the efficiency
of the SsCP500, the efI$iency cannot be rejected. For example, when only the 5 largest
portfolios are used, 0E2 is equal to 0.675 which F very close to 4; which is 0.637 in
1945-1964, where p is the S&P 500 Index, while t3E2is equal to 0.795 when all the 10
portfolios are used in the test. Therefore, the efficiency of the S&P 500 Index which
consists of only large-size stocks can be rejected when all ten portfolios which include
the small-size portfolios are used. That is, using the S&P500 as the benchmark, the
overall abnormal performance of the first five largest stock portfolios is indeed zero.
In other words, the S&P500 is an unbiased benchmark for measuring the large-stock
mutual funds.

The Jensen Measure and the Maximum Slope Measure

In a multivariate framework, there is no abnormal portfolio performance if 6z2

is close enough to 6: when the benchmark is indeed efficient. Therefore, it is
important to examine the efficiency of the benchmark before portfolio performance
is measured against it. Also, note that the efficiency of the benchmark changes over
time as shown in Table 2. It indicates that CRSP Equally-Weighted Index is not
efficient in the periods 1951-1960 and 1981-1985, while it is efficient for the rest of
the time.
In order to compare the Jensen measure for individual portfolios with the slope
measure of efficiency, we calculate the Jensen’s alphas 0: the 10 beta-sorted stock
portfolios for the periods with the smallest and the largest t3E2in Table 7. In 1981-85,
Table 7. ALPHA ESTIMATES BY BETA DECILE FOR THE FOUR lo-YEAR
SUBPERIODS IN 1941-1985
Decile by beta 194160 1951-60 1971-80 1981-85

largest -0.0039 a.o074* 0.0009 a.o063*

2 -0.0031 -0.0043* 0.0003 -0.0071*
3 a.0015 -0.0017* 0.0005 a.0015
4 0.0009 -0.0008 0.0008 -0.0022
5 0.0000 -0.0010 0.0005 a.0005
6 -0.0002 0.0004 0.0007 0.0017
7 0.0017 0.0016* -0.0006 0.0005
8 0.0024* 0.0035* -0.0002 0.0027
9 0.0026* 0.0039* -0.0003 0.0054*
10 0.0022 0.0036* 0.0003 0.0079*
0.173 0.337* 0.046 0.424*

No/r: 0: is the maximum squared slope of the efficient frontier with the 10 beta-sorted portfolios. The ten portfolios are equal-weighted.

GE2(=0.424) is significant compared to 6: (=0.027) and the Jensen alphas have &values
greater than 2.0 in absolute value in 4 cases out of the 10 portfolios. For the period
1951-60, the maximum squared slope is 0.337 which is also statistically significant
and 7 portfolios have significant Jensen measures. From this result, it can be
concluded that the inefficiency of the benchmark generates spurious performance
in the Jensen measure.
Let us make the same comparison for the period when the maximum squared
slope measure is insignificant compared to &, implying the efftciency of the bench-
mark. For 1941-50, the maximum squared slope is 0.173 and only two portfolios have
significant alphas. Interestmgly, none has a significant tvalue for the Jensen’s meas-
ure for period 1971-80 (t3E2 = 0.046). We extend this exercise for the Jensen
(1945-64) and the Ippolito period (1965-84) for comparison purpose.
As shown in Table 8, the S&P 500 Index and the value-weighted NYSE Index are
efficient for the period 1945-1964, while they are significantly inefficient in 1965-84.
Therefore, we need to find or construct an efficient benchmark with respect to the
LHS assets.14 Basically, we are concerned with spurious ‘abnormal performance’ in
naive stock portfolios (e.g., the significant Jensen alpha particularly for the Ippolito
period). The abnormal alpha may be due to the inefficiency of the benchmark in
that period. Therefore, we examine the four 5-year subperiods of the period 1965-84
to identify a particular period in which the benchmark portfolio is efficient. Unfor-
tunately, we find that the benchmarks (e.g., the S&P 500 and the Value-Weighted
Index) are inefficient in all the subperiods. Interestingly, however, the intercepts in
two subperiods (1970-74 and 1980-84) are not significantly different from zero. This
implies that even inefficient benchmarks can produce a zero Jensen measure and
thus, a careful interpretation of the Jensen measure is required. The problem in the
single factor model leads to a discussion of multifactor models in the next section.
200 QUARTERLY REVIEW OF ECONOMICS AND FINANCE

Tubb 8. ALPHA ESTIMATES BY SIZE DECILE FOR THEJENSEN (1945-64)

AND THE IPPOLITO (1965-84) PERIODS FOR AITERNATIYE BENCHMARK
INDICES

S&P index EW index VW index

Decile by size 1945-64 1965-84 1945-64 1965-84 1945-64 1965-84

Largest -0.0004 -0.0008 0.0017 -0.0032* -0.0001 -0.0012

2 0.0002 0.0007 0.0013 X1.0026* 0.0001 0.0003
3 -0.0005 0.0019 0.0003 -0.0018* -0.0006 0.0015
4 -0.0006 0.0034* 0.0000 -0.0005 -0.0008 0.0029*
5 -0.0008 0.0026 -0.0002 -0.0015* -0.0009 0.0022
6 -0.0004 0.0052* 0.0000 0.0010 -0.0006 0.0048*
7 -0.0013 0.0050* -0.0011* 0.0002 -0.0015 0.0045*
8 -0.0016 0.0061* -0.0016* 0.0013 -0.0018 0.0056*
9 0.0005 0.0076* 0.0004 0.0025* 0.0003 0.0071*
10 -0.0006 0.0095* -0.0012 0.0040* -0.0008 0.0089*
0.0857 0.0011 0.0653 0.0114 0.0819 0.0017
,“g 0.1182 0.1082 0.1154 0.1100 0.1203 0.1091
0.0299 0.1070* 0.0470 0.0974” 0.0355 0.1072*

Sensitivity of the CAPM and APT Benchmark15

Lehman and Modest (1987) show that the evahtation of mutual funds is sensitive
to alternative benchmarks including the standard CAPM benchmark and a variety of
the APT benchmarks. Theoretically, Green (1986) shows that the relative rankings
of portfolio performance can be reversed for any inefficient CAPM benchmark.
Further, Grinblatt and Titman (1987) provide an equivalency relationship between
mean-variance efficiency and the APT. Thus, in this section, we discuss the sensitivity
of the alternative benchmarks in view of the efficiency of a benchmark.
It is well established that the market portfolio in the CAPM or a single index
benchmark can be decomposed into multi-beta portfolios. Therefore, when the
single market proxy used does not represent the whole market but only part of it, the
APT multiple benchmarks may explain the sensitivity of the single index model.
Indeed, EGDH employ a multifactor approach to control for the omitted asset and
show that the Jensen’s alpha becomes insignificant after controlling for the small-firm
portfolios and the bond portfolio.‘6
We take a similar multifactor approach to estimate theJensen’s alpha for the
Ippolito period (1965-1984) in which the simple regression intercepts are signifi-
 EFFICIENCY OF PORTFOLIO PERFORMANCE MEUUREMENT 201

Table 9. ALPHA ESTIMATES AND THE ADJUSTED

COEFFICIENT OF DETERMINATION (R2) BY SIZE
DECILE IN THE SINGLE AND MULTI-FACTOR MODEL
FOR THE PERIOD OF 1965-1984
Decile u t-value Ril @
Largest -0.0003 -0.59 0.96 0.96
2 -0.0004 -0.49 0.93 0.91
3 -0.0000 -0.05 0.92 0.85
4 0.0009 -0.96 0.93 0.84
5 -0.0009 J.I.99 0.93 0.78
6 -0.0015 1.79 0.95 0.80
7 0.0002 0.24 0.95 0.75
8 0.0009 0.95 0.95 0.70
9 0.0014 0.96 0.96 0.67
10 0.0019 2.04 0.96 0.59

Mean 0.0002 0.20 0.95 0.79

h’ott: e and ti are the ndjwl~l coeflicients of determination for the multifactor model and the single
index model. respectively.

candy large.17 In controlling for the omitted assets we use the Ibbotson-Sinquefield
small-stock index to proxy the small-firm benchmark and a bond index (50% of the
long-term corporate bond index return and 50% of the long-term government bond
index return) in addition to the S&P 500 index return. Table 9 shows that all the
intercepts are not significantly different from zeros except for the smallest decile
portfolio, which is quite a different result from the single index model. This suggests
that the APT benchmarks are generally efficient and thus are more appropriate
benchmarks for portfolio performance measurement. It is also noteworthy to observe
that the adjusted R2s for the multifactor model are consistently very high with the
mean of 0.95, while the mean adjusted R2 for the single index is 0.79 and the value
is decreasing as the size of the LHS portfolio decreases. For example, the adjusted
R2 is 0.96 for the largest portfolio and is only 0.59 for the smallest portfolio. This adds
further evidence that the multifactor index model explains the LHS assets much
better than the single index model.”

CONCLUSIONS

This paper emphasizes the importance of selecting the LHS assets from the ‘re-
stricted class’ of assets defined in the paper when a portfolio’s mean-variance
efficiency is examined. We have derived two propositions which explain the sensitivity
in the test statistics to the choice of the LHS asset in testing portfolio efficiency and
202 QUARTERLY REVIEW OF ECONOMICS AND FINANCE

measuring portfolio performance. The magnitude of the sensitivity is shown to

depend on the risk/return characteristics of the omitted LHS assets relative to the
original assets. We employ beta-sorted stock portfolios (the original assets) and a
corporate bond and a government bond index (the omitted assets) and the CRSP
Equal-Weighted Index as portfolio p and provide empirical evidence to support our
results regarding the sensitivity in the test of its efficiency, It is shown in two lo-year
subperiods that the efficiency of the CRSP EW Index is not rejected when the 10
beta-sorted stock portfolios are used, but the same index is rejected for its
efficiency when either the corporate or government bond index is added to the
test. This sensitivity problem can be serious, depending on the type of the omitted
assets. The exact nature of the sensitivity is explained by the condition in Propo-
sition 1.
Our results have important implications for portfolio performance measure-
ment. We employ the GRS multivariate statistic which is a nonlinear function of the
Jensen’s alpha. This statistic has advantages in measuring overall performance,
especially for size-sorted portfolios since the residuals are highly correlated. This
correlation may inject a bias in estimating the alphas for individual portfolios. Using
the maximum slope parameter, the results of EGDH are reinterpreted in that the
apparent abnormal performance in size-sorted portfolios are due to the bias
injected by omitting the small stocks from the market benchmark (i.e., the
S&P500 index). For example, the efficiency of the S&P500 cannot be rejected
only when the large portfolios (without the small stocks) are used in the test. It
is shown that a very distinct behavior of the small stocks in the Ippolito period
(1965-84) can explain the seemingly huge abnormal performance documented
by Ippolito (1989).
Also, the empirical analysis reveals that the efficiency of an index changes over
time and inefficiency of the benchmark generates spurious performance in the
Jensen measure. This result warrants a caution in choosing a benchmark index in
different time periods in measuring abnormal return in portfolio performance.
Further, the results support the use of the ‘asset class factor model’ in portfolio
management measurement. Finally, an extension to the conditional moments ap-
proach would be an interesting project although the focus here is on the uncondi-
tional moments approach to mean-variance efficiency.

Acknowledgment: We thank Theodore Day, Kevin Dougherty, David Emanuel,

Larry Merville, Richard Green and the participants at the 1994 Midwest Finance
Association meeting for many valuable comments. Hyunrin Shin and Rob Maurer
provided excellent research assistance. A previous version of the paper, “Tests of the
Efficiency of a Portfolio and Optimal Choices OfAssets,” was selected as the Outstand-
ing Paper in Investments at the 1994 Midwest Finance meeting.
 EFFICIENCY OF PORTFOLIO PE~O~CE GAEL 203

APPENDIX

PROOF of Proposition 1
Applying an inversion of a partitioned matrix,

NOTES

*Direct all correspondence to: Yoon K. Choi, University of Texas at Dallas, School of
Management, 2601 N. Floyd Road, Richardson, TX 750834638.
1. An example is when four preferred stocks and bond portfolios are used as part of the
assets in testing the efficiency of a broad market index which does not contain these assets as
in Stambaugh (1982). The broad market index consists of NYSE Index, corporate bonds,
government bonds, and real estate properties. Actnally, Stambaugh does not test the efftciency
of the true market portfolio. Instead, he tests the CAF’M with some market proxies. These two
tests become identical only when the market proxy used is a ‘correct’ proxy for the true market
204 QUARTERLY REVIEW OF ECONOMICS AND FINANCE

portfolio. Therefore, for Stambaugh’s purpose, his test is not misspecified. We argue the test
is misspecified when the purpose is to test the efficiency of the broad market index.
2. The emphasis on this particular class of assets is consistent with the mathematics of
the efficient set shown in Roll (1977). That is, it is implicit that the linear beta/return
relationship only applies to the individual assets used to construct the efficient set (see
Corollary 6 in the Appendix in his paper).
Previous research has focused on misspecilications due to a market proxy-a problem of
the omitted assets from the market portfolio construction. For example, Mayers (1973) points
out human capital as an important component, often omitted, for the aggregate wealth
portfolio in the CAPM test. Fama and Schwert (1977) and Jagannathan and Wang (1993)
employ labor incomes as a proxy for human capital in their tests of the CAPM.
3. For example, when we want to test the efficiency of the S&P500 index, a well-specified
question is to ask whether the S&P500 index would lie on the efficient frontier constructed
with the 500 stocks or the portfolios derived from them.
4. Also, see Kandel (1984)) Roll (1985)) Shanken (1985), Ma&inlay (1987), and Kandel
and Stambaugh (1987) for more multivariate tests examples.
5. Also, see Bodurhta and Mark (1984), Roll (1985)) Shanken (1985)) Ma&inlay (1987),
and Kandel and Stambaugh (1987) for more multivariate tests examples.
6. Green (1986) argues that inefficiency ofa benchmark can generate spurious abnormal
performance. We emphasize a proper selection of the LHS assets in testing the efficiency of
a benchmark.
7. This point is more relevant with the equilibrium APT Grinblatt and Titman (1987)
show the equivalency relationship between mean-variance efficiency and the APT
8. Strictly speaking, we are not holding the sample size, N, constant because of the
additional omitted assets in the analysis. However, since we are adding just one or two assets,
we believe that the effect of these additional assets on the analysis is minimal. Again, we are
interested in the risk/return characttistics of the added assets and their effect on the sensitivity,
notjust the effect of the numberof the LHS asset.
9. We also tried the 20 and 40 beta-sorted portfolios and found that in every period, the
efficiency of the CRSP Index is not rejected. One reason may be that the weight assigned to
the omitted asset sharply decreases as the number of the stock portfolios doubles. It also
demonstrates that the power of the test falls when the number of the LHS assets increases.
10. GRS find that the correlation of the market model residuals of the size portfolios
changes systematically (Table lV in their paper). That is, the correlation is positive and high
among the large-size decile portfolios. The correlations are low among different decile
portfolios. Interestingly, the smallest decile portfolio has negative sample correlation with all
other decile portfolios.
11. For the mutual fund analysis, we use size-based portfolios similar to GRS. That is, we
form 10 portfolios based on the relative market value of their total equity outstanding. Each
portfolio is value-weighted and resorted by their market values every five years. We resorted
and rebalanced the 10 portfolios in December 1925,1930,..., 1980.
12. We examine the correlation of the residuals from the simple regression between each
portfolio’s return and the benchmark returns, using the dame data as in EGDH.,For the period
from 1945-64 (the Jensen Period), the correlations are positive and very high (.60 to .96 as
compared to .21 to .75 in the GRS’ period of 1926 to 1982) for portfolio 2 and portfolio 10
 EFFICIENCY OF PORTFOLIO PERFORMANCE MEASURFMENT 205

(the smallest decile portfolio). The largest decile portfolio has negative correlation with 5
other portfolios and positive correlation with 4 other portfolios.
13. We use the annual return data in this section only to make a proper comparison with
EGDH’s results, which leaves us with only 20 observations in the regression. Otherwise, we use
the monthly returns with more observations for more powerful tests.
14. In view of Proposition 2, it becomes clear which benchmark portfolio is appropriate
in measuring the performance of a mutual fund. EGDH claim that the Small Cap Index is
more appropriate than the S&P 500 when we measure the performance of a small stocks
mutual fund. Proposition 2 theoretically supports their argument. That is, by using the Small
Cap Index, the omitted assets bias can be avoided.
15. The relationship between the CAPM and the APT discussed in this section is not to
be exactly described. Therefore, readers should take the discussion in this section as a
diagnostic nature. See Dybvig and Ross (1985) and Shanken (1985) for details for empirical
tests of the APT
16. See Connor and Korajczyk (1986) and Grinblatt and Titman (1987) for a theoretical
support for the APT in measuring portfolio measurement. Dybvig and Ross (1985) derive a
relationship between the CAPM market portfolio and the APT multi-factor model.
17. EGDH use “orthogonalized” portfolios in order to separate a unique explanatory
power of each portfolio from each other. Since we are not interested in estimating the unique
sensitivity beta of each index, multicollinearity problems can be ignored.
18. This result provides additional support for the practice of using an asset class factor
model in measuring portfolio management. For example, see Sharpe (1988,1992).

REFERENCES

[l] Black, F., M. Jensen and M. Scholes. (1972). “The Capital Asset Pricing Model: Some
Empirical Tests.” Pp. 79-121 in Studies in the Theory of Capital Markets, edited by M.
Jensen. New York: Prager.
[2] Bodurtha, J. and N. Mark. (1991). “Testing the CAPM with Time-Varying Risks and
Returns.” Journal ofFinance, 46: 1485-1505.
[3] Connor, G. and R. Korajczyk. (1988). ‘Risk and Return in an Equilibrium APT: Application
of a New Methodology.” Journal ofFinancial Economics, 21: 255-289.
[4] Dybvig, P. andS.Ross. (1985). ‘Yes, theAPTisTestable.“JournalofFinance, 40.1173-1188.
[5] Elton, E., M. Gruber, S. Das and M. Hlavka. (1993). “Efficiency with Costly Information:
A Reinterpretation of Evidence from Managed Portfolios.” Review ofFinancialStudies, 6:
l-22.
[6] Fama, E. and G. Schwert. (1977). “Asset Returns and Inflation.” Journal of Financial
Economics, 5: 115-146.
[7] Ferson, W., S. Kandel and R. Stambaugh. (1991). “Tests ofAsset Pricingwith Time-Varying
Expected Risk Premium and Market Betas.” Journal ofFinance, 46: 201-220.
[8] Gibbons, M. (1982). “Multivariate Tests of Financial Models: A New Approach.” Journal of
Financial Economics, 10: 3-7.
[9] Gibbons, M., S. Ross and J. Shanken. (1989). “ATest of the Efftciency of a Given Portfolio.”
Econometrica, 57: 1121-l 152.
[lo] Gibbons, M. and J. Shanken. (1987). “Subperiod Aggregation and the Power of Multi-
variate Tests of Portfolio Efficiency.” Journal of Financial Economics, 19: 389-394.
[ 1 I] Green, R. (1986). “Benchmark Portfolio Inefficiency and Deviations from the Security
Market Line.” Journal of Finance, 41: 295-312.
206 QUARTERLY REVIEW OF ECONOMICS AND FINANCE

[ 121 Grinblatt, M. and S. Titman. (1987). “The Relation Between Mean Variance Efficiency
and Arbitrage Pricing.” Journal of Business, 60: 97-112.
[ 131 Huberman, G. and S. Kandel. (1987). “Mean Variance Spanning.” Journal of Finance, 42:
383-388.
[14] Ippolito, R. (1989). “Efficiency with Costly Information: A Study of Mutual Fund
Performance.” Quarterly Journal of Economics, 104: l-23.
[15] Jagannathan, R. and Z. Wang. (1993). The CAPM is Alive and Well. Working paper,
University of Minnesota.
[ 161 Kandel, S. (1984). “The Likelihood Ratio Test Statistic of Mean-Variance Efficiency
without a Riskless Asset.” Journal ofFinancial Economics, IA 575-592.
[ 171 Kandel, S. and R. Stambaugh. (1987). “On Correlations and Inferences about Mean-Vari-
ance Efficiency.” Journal of Financial Economics, 18: 61-90.
[ 181 Lehman, B. and D. Modest. (1987). “Mutual Fund Performance Evaluation: A Compari-
son of Benchmarks and Benchmark Comparisons.” Journal of Finance, 42: 233-265.
[ 191 MacKinley, A. (1985). An Analysis of Multivariate Financial Tests. Ph.D. dissertation,
Graduate School of Business, University of Chicago.
[201 -. (1987). “On Multivariate Tests of the CAPM.” Journal of Financial Economics, 18:
341-372.
[21] Mayers, D. (1973). “Nonmarketable Assets and Capital Market Equilibrium under
Uncertainty.” Pp. 223-248 in Studies in the Theory of Capital Markets, edited by Michael
C. Jensen. New York: Praeger.
[22] Ng, L. (1991). “Tests of the CAPM with Time-Varying Covariances: A Multivariate GARCH
Approach.” Journal ofFinance, 46: 1507-1521.
[23] Ng, V., R. Engle and M. Rothschild. (1992). “A Multi-Dynamic-Factor Model for Stock
Returns.” Journal ofEconomettics, 52: 245-266.
[24] Roll, R. (1977). “A Critique of the Capital Asset Pricing Theory’s Tests; Part I: On Past
and Potential Testability of the Theory.” Journal of Financial Economics, 4: 129-l 76.
[25] -. (1985). “A Note on the Geometry of Shanken’s CSR T* Test for Mean/Variance
Efficiency.” Journal of Financial Economics, 14: 349-358.
[26] Shanken, J. (1985). “Multi-Beta CAPM or Equilibrium APT? A Reply.” Journal of Finance,
40.1189-1196.
[271 -. (1985). “Multivariate Tests of the Zero-Beta CAPM.“Journal ofFinancialEconomics,
14: 327-348.
[28] Sharpe, W. (1988). “Determining a Fund’s Effective Asset Mix.” Investment Management
Review, (December): 59-69.
WI -. (1992). “Asset Allgcation: Management Style and Performance Measurement.”
Journal of Portfolio Management, (Winter): 7-19.
[30] Stambaugh, R. (1982). “On the Exclusion of the Assets from Tests of the Two-Parameter
Model: A Sensitivity Analysis.” Journal of Financial Economics, 10. 237-268.
[31] Turtle, H., A. Buse and B. Korkie. (1994). “Tests of Conditional Asset Pricing with
Time-Varying Moments and Risk Prices.” Journal of Financial and Quantitative Analysis,
29: 15-29.