The Two-Block Covariance Matrix and the CAPM
International Journal of Portfolio Analysis & Management, Forthcoming
Posted: 1 Feb 2012
There are 2 versions of this paper
The Two-Block Covariance Matrix and the CAPM
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: Suggested Citation