Testing Portfolio Efficiency with Non-Traded Assets: Taking into Account Labor Income, Housing and Liabilities



This study extends the classical Gibbons, Ross and Shanken (1989) test for mean-variance efficiency of a given portfolio to include linear equality restrictions on the weights of a subset of restricted assets. The restricted assets can be thought of as illiquid or non-traded. This includes the relevant applications of testing portfolio efficiency while taking into account non-traded labor income, housing and pension liabilities. Assuming a conditional normal distribution for the asset returns, we show that the test statistic follows an F-distribution in small samples.
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Ingolf Dittmann