University of Washington - Department of Finance
We provide solutions to the problem "How are mean-variance efficient portfolios formed in the presence of conditioning information?" The unconditional minimum-variance portfolio weights are derived in closed form. Our solutions attain the smallest unconditional variance, for a given unconditional mean, among all possible dynamic strategies that may use the conditioning information. We provide solutions for n risky assets, either with or without a riskless asset. We illustrate the properties of the optimal strategies and some applications of the results. One application refines the Hansen-Jagannathan (1991) bounds on stochastic discount factors.