Portfolio Selection and Asset Pricing—Three-Parameter Framework
Management Science · 1993 · Volume 39 · Issue 5
Abstract
Idiosyncratic security risks are modelled as following a joint spherical distribution characterized by a mean vector and a generalized covariance matrix. Skewness is generated by a single factor for the whole economy, but upon which different securities have different loadings. This results in three-fund separation—two funds to span the spherical risk and one more fund to span the additional skewness risk. A three-parameter normative portfolio analysis that allows short sales restrictions is developed. In addition, a three-parameter capital asset pricing model is provided.
Keywords
finance, portfolio analysis, capital asset pricing, elliptical distributions, skewness in portfolio analysis
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