The Econometrics of Efficient Frontiers.

An efficient portfolio maximizes the expected utility of future wealth. This paper presents an analysis of the efficiency frontier, formed by a set of efficient portfolios corresponding to a parameterized class of utility functions. First we discuss the estimation of Tan efficient portfolio and introduce a test of efficiency hypothesis. Next we analyse the shape of the frontier and develop a procedure for testing the separability of the efficiency frontier into K independent funds. We illustrate our approach by an application to portfolios including derivatives.