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Title:Two-Fund separation and positive marginal utility PDF Logo
Authors:Breuer, Wolfgang
Gürtler, Marc
Issue Date:2004
Series/Report no.:Working papers // Institut für Finanzwirtschaft, Technische Universität Braunschweig FW11V3
Abstract:The requirement of positive marginal utility only makes it possible to derive a restricted twofund separation theorem for portfolio selection problems replacing the original separation theorem of Cass and Stiglitz (1970). We use our findings for a re-examination of the bias-in-beta problem in mutual funds performance evaluation and of the relevance of the standard CAPM without borrowing restrictions. We also present empirical evidence for the only limited validity of the separation theorem when explicitly recognizing positive marginal utility. Moreover, quadratic utility functions are not apt to approximate the admissible range of risk preferences in the case of higher-order utility functions.
Subjects:two-fund separation
HARA utility
positive marginal utility
borrowing restrictions
Capital Asset Pricing Model, bias in beta, performance evaluation
JEL:G11
Document Type:Working Paper
Appears in Collections:Working Paper Series, Institut für Finanzwirtschaft, TU Braunschweig

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