A Bayesian approach to testing portfolio efficiency

This paper develops a Bay-esian test of portfolio efficiency ~ and derives a computationally convenient posterior-odds ratio. The analysis indicates that stgniticance levels higher than the traditional 0.05 level are recommended for many test situations. in an example from the literature. the classical test fails to rgect with p-value 0.082. yet the odds are nearly two to one against efficiency under apparently reasonable assumptions. Procedures for testing approximate efficiency and for aggregating subperiod results are also considered. 1