Abstract
The potential performance of an asset set may be obtained by choosing the portfolio proportions to maximize the Sharpe (1966) performance measure. If a portfolio has a Sharpe measure equivalent to the potential performance of the underlying set of assets, then it is efficient. Multivariate statistical procedures for comparing potential performance and testing portfolio efficiency are developed and then evaluated using simulations. Two likelihood ratio statistics are then used to compare stock and bond indices against sets of 20 and 40 portfolios. The procedures are also compared to the Gibbons (1982) methodology for testing financial models.
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