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Abstract:
The goal of this study is the derivation and application of a direct
characterization of the inverse of the covariance matrix central to portfolio
analysis. As argued below, such a specification, in terms of a few primitive
constructs, provides new and illuminating expressions for such key concepts as
the optimal holdings of a given risky asset and the slope of the risk-return
efficiency locus faced by the individual investor. The building blocks of the
inverse turn out to be the regression coefficients and residual variance
optained by regressing the asset's excess return on the set of excess returns
for all other risky assets.
Full paper (155 KB PDF)
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Full paper (1159 KB Postscript)
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