I don’t really understand whats going on here. The problem is that mean variance optimization is too sensitive to changes so we make it better by making it less accurate? CAPM says we should have no limits on short selling. But mean variance optimization says we need to limit shortselling. Anyone have a good explanation for this?
Yea i had trouble on this I thought the answer should say no short selling constraint, meaning no constraint on short selling. i was like wtf too.
i think I remember say WTF but i figured it out A “no short selling constraint” leads to STABILITY The absence of a “no short selling constraint” leads to INSTABILITY
i have that part down but isn’t that not the optimal market portfolio if stocks cant be shorted down? Yeah, its more stable but it measures less?
you sure you aren’t reading it wrong? I thought she was saying the instability was caused by a short sales contraint that was in place. Thus implying there should be no limit on short selling.
looked back and ignore my post above…
Not positive, but I think I looked that one up in the textbook a month ago. At first I couldn’t understand a word of it. Typical PM theory-jargon
to me it sounds like, My taxes changes to much every year, if i don’t account for changes, its more stable…
all over the gleekum glokum universe
yea because one of the original assumptions was short selling is allowed, but most people would interpret a “no short sales constraint” as a NO YOU CAN’T SHORT SELL and appparently that leads to stability.
On the CAPM, the security market line is a combination of the optimal portfolio and lending borrowing at the risk free rate. By lending, you can actual create a portfolio that has a variance less than the minimum variance portfolio. I always attributed this to the assumption regarding borrowing/lending, but could it also have to do with the short sales constraint, and why the two theories seem to conflict?
jmac / vinnie i guess according to CAPM mean variance optimization, then short selling leads to instability - does that sound right?
i think their different items. CAPM needs short selling, but short selling leads to instability in mean variance optimization and must be prohibited.
I guess that is the consensus.