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On the Insignificant Cross-Sectional Risk-Return Relationship

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Author(s): Michael Z. F. Li | Joseph C. S. Kang | Gerald H. L. Cheang

Journal: Advances in Molecular Imaging
ISSN 2161-6728

Volume: 02;
Issue: 01;
Start page: 38;
Date: 2012;
Original page

Keywords: CAPM | Portfolio Theory | Mathematical Finance | Market Risk and Expected Return | Cross-Sectional Relationship | Theory and Evidence | Mathematical Derivation

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.
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