Allen, D., Lizieri, C. and Satchell, S.

Mean-Variance versus 1/N: What if we can forecast? (Updated 22nd December 2013)

CWPE1244

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.

Keywords: Portfolio Choice, Investment Decisions, Financial Forecasting and Simulation

JEL Codes: G11 G17

PDF: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1244.pdf

Open Access Link: https://doi.org/10.17863/CAM.1020

<< CWPE Home | CWPE List 2012 >>