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1/N versus Mean-Variance


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Working Paper

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Authors

Allen, David 
Lizieri, Colin 
Satchell, Stephen E. 

Abstract

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.

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Keywords

Portfolio Choice, Investment Decisions, Financial Forecasting and Simulation

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Publisher

Faculty of Economics

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