The Two-Block Covariance Matrix and the CAPM

International Journal of Portfolio Analysis & Management, Forthcoming

Posted: 1 Feb 2012

See all articles by David Disatnik

David Disatnik

Tel Aviv University - Faculty of Management ; Tel Aviv University - Faculty of Management

Simon Benninga

Tel Aviv University - Faculty of Management

Multiple version iconThere are 2 versions of this paper

Date Written: January 31, 2012

Abstract

The classical assumptions of the Capital Asset Pricing Model do not ensure obtaining a tangency (market) portfolio in which all the risky assets appear with positive proportions. This paper gives an additional set of assumptions that ensure obtaining such a portfolio. Our new set of assumptions mainly deals with the structure of the covariance matrix of the risky assets returns. The structure we suggest for the covariance matrix is of a two-block type. We derive analytically sufficient conditions for a matrix of this type to produce a long-only tangency portfolio (as well as a long-only global minimum variance portfolio).

Keywords: portfolio optimization, block covariance matrix, tangency portfolio, market portfolio, CAPM

JEL Classification: G11, C13

Suggested Citation

Disatnik, David J. and Disatnik, David J. and Benninga, Simon, The Two-Block Covariance Matrix and the CAPM (January 31, 2012). International Journal of Portfolio Analysis & Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1996633

David J. Disatnik (Contact Author)

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

Simon Benninga

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
+972-3-640-6317 (Phone)
+972-2-673-4675 (Fax)

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