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Using industry momentum to improve portfolio performance

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  • Behr, Patrick
  • Guettler, Andre
  • Truebenbach, Fabian
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    Abstract

    Minimum-variance portfolios, which ignore the mean and focus on the (co)variances of asset returns, outperform mean–variance approaches in out-of-sample tests. Despite these promising results, minimum-variance policies fail to deliver a superior performance compared with the simple 1/N rule. In this paper, we propose a parametric portfolio policy that uses industry return momentum to improve portfolio performance. Our portfolio policies outperform a broad selection of established portfolio strategies in terms of Sharpe ratio and certainty equivalent returns. The proposed policies are particularly suitable for investors because portfolio turnover is only moderately increased compared to standard minimum-variance portfolios.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 5 ()
    Pages: 1414-1423

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:5:p:1414-1423

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Portfolio optimization; Industry momentum; Minimum-variance portfolios;

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    References

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    Cited by:
    1. Auer, Benjamin R. & Schuhmacher, Frank, 2013. "Performance hypothesis testing with the Sharpe ratio: The case of hedge funds," Finance Research Letters, Elsevier, vol. 10(4), pages 196-208.

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