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Faculty of Economics

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

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


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


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