Forecasting Expected Returns in the Financial Markets

Appendix A: Proofs of Theorems

Appendix A: Proofs of Theorems

In this Appendix, we prove Theorems 1 and 2 of Section 4.2.4, and justify the need for the interior in Theorem 2.

Proof of Theorem 1

First, suppose that b ? Q is a strict normal. If there is a ? ? with ? ? w, then in particular ? w, that ( ? ? w) T r ? 0 for all r ? Q. But this contradicts the hypothesis.

Second, suppose that b ? is a normal that is, that b T( ? ? w) ? 0 for all ? ? . Suppose there is a ? ? with ? w (that is, ( ? ? w) T r ? 0 for all r ? Q) then ( ? ?w) T b = 0. Since b ? , for any s ? R, b + ?s ? Q for ? small. Then ( ? ? w) T( b + ?s) ? 0, which implies that ( v ? w) T s = 0 for all s ? R, so ? ? w ? R ?. But then it is impossible that ( v ? w) T r > 0 for any r ? Q, so v ? w.

Simple examples show that the strictness conditions are necessary.

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