Unstable minimum variance efficient frontier is attributed to 1. Short sale constraint 2. Historical Betas A. Yes B. No, incorrect about Short sale constraint C. Incorrect about historical betas. Can anybody explain.
A. Historical betas used in the outputs - can change - resulting in a shift in the minimum variance frontier. Short Sales - small changes in the inputs (mean, variance, covariance of assets) would result in identifying some asset to be sold short - which impacts the frontier for the future.
The answer says B.
yea i remember this. B is correct. I think it said that a LACK of short sale constraint contributes to Unstable minimum variance efficient frontier…
hmm … it was so puzzling … GOOGLED it to land here. Okay then CONTROL short sale for the STABILITY of the Min Variance Frontier.
Look at other thread below
question asks why in MVF unstable - the answer is b/c it requires many large short positions… the answer given above in the mock question is a remedy to correct for instability - not a cause