TITLE:
On the Insignificant Cross-Sectional Risk-Return Relationship
AUTHORS:
Gerald H. L. Cheang, Joseph C. S. Kang, Michael Z. F. Li
KEYWORDS:
CAPM; Portfolio Theory; Mathematical Finance; Market Risk and Expected Return; Cross-Sectional Relationship; Theory and Evidence; Mathematical Derivation
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.2 No.1,
February
28,
2012
ABSTRACT: In their paper, “On the Cross-sectional Relation between Expected Returns and Betas”, Roll and Ross (1994) demonstrated that the expected returns and betas can have zero relationship even when the underlying market portfolio proxies are nearby the efficient frontier. In this note, we provide the mathematical details that lead to their conclusion and further show that their claim needs not hold for the entire set of MV portfolios.