Limiting Investment Opportunity Sets, Asset Pricing, and the Roll Critique

Vol. 22, No. 1, 2024
Bob Korkie and H. J. Turtle

We consider the impact of low volatility assets on the investment opportunity set (IOS) and resultant asset pricing. The limiting IOS and its finite investable proxy imply an asset pricing model that differs from standard asset pricing models. The Sharpe (1964)–Lintner (1965) CAPM with a unique market portfolio is not descriptive of asset pricing and the zero-beta rate of the Black model, converges to the exogenous riskless rate. Spanning tests show that the limiting IOS, with estimated slope and upper bound Sharpe ratio of 0.18, is given by the linear limiting IOS asymptotes, implying multiple efficient portfolios of risky assets. We find no evidence of any efficient portfolio with only positive weights, implying that the market portfolio is not mean–variance efficient.