The Cross-Section of Positively Weighted Portfolios

This paper examines properties of mean-variance inefficient proxies NEWLINE with respect to producing a linear relation between expected returns NEWLINE and betas. The numerical results of a Monte Carlo simulation show NEWLINE that in the CAPM slightly inefficient, positively weighted proxies cause NEWLINE an almost perfect linear expected return - beta relation. Moreover, we NEWLINE show that a strong linearity among a predefined subset of assets exists. NEWLINE These implications are important for the interpretation of empirical NEWLINE tests as well as for asset pricing and for the improvement of proxies’ NEWLINE benchmark properties. In contrast to current literature the results NEWLINE suggest that the CAPM’s pricing error is small when slightly inefficient, NEWLINE positively weighted proxies are used.