1/N versus Mean-Variance
Satchell, Stephen E.
Cambridge Working Papers in Economics
Faculty of Economics
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Allen, D., Lizieri, C., & Satchell, S. E. (2012). 1/N versus Mean-Variance. http://www.econ.cam.ac.uk/dae/repec/cam/pdf/cwpe1244.pdf
Mean-variance optimisation has been roundly criticised by financial economists and practitioners alike, leading many to advocate a simple 1/N weighting heuristic. We investigate the performance of the Markowitz technique conditional on investor forecasting ability. Using a novel analytical approach, we demonstrate that investors with a modicum of forecasting ability can employ mean-variance to significantly increase their ex ante utility, outperforming the 1/N rule.
Portfolio Choice, Investment Decisions, Financial Forecasting and Simulation
External link: http://www.econ.cam.ac.uk/dae/repec/cam/pdf/cwpe1244.pdf
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