Mean-Variance versus 1/N: What if we can forecast? (Updated 22nd December 2013)
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Authors
Allen, D.
Lizieri, C.
Satchell, S.
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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Portfolio Choice, Investment Decisions, Financial Forecasting and Simulation
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Faculty of Economics