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Two-fund separation, factor structure and robustness

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This paper studies two-fund separation and factor structures in asset markets. Sharpened necessary and sufficient conditions for distributional two-fund separation are presented. When asset prices are flexible, two-fund separation is equivalent to a two-factor structure in the joint distribution of total returns. When one of the funds is a riskless asset, separation is equivalent to the market model. The market model is robust to small changes in the asset supplies only if the joint distribution of total returns is spherically generated

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en

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application/pdf

Resource resource URL

http://flora.insead.edu/fichiersti_wp/Inseadwp1991/91-04.pdf

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Copyright INSEAD. All rights reserved