THE CHARPIN–LACAZE RESPONSE TO C. C. Y. KWAN'S PAPER "LONG-SHORT PORTFOLIO MODELING: CRITIQUE AND EXTENSION"

Abstract

With this note, we refute Kwan's criticism. On one hand, the choice of an inequality budget constraint allows us, for μ greater than μ0, to study the useful part of the efficient frontier. On the other hand, the assumption that the cost of constructing long-short portfolios is positive, seems quite reasonable when transactions costs are included. Finally, we consider Kwan's revised model and explain why his formulation does not work.