Mean-Absolute-Deviation Characteristic Lines for Securities and Portfolios
AbstractThe characteristic line of a security or portfolio relates its rate of return to that of a "market portfolio." Several investigators have suggested the desirability of obtaining such a line by minimizing the sum of the absolute deviations rather than the sum of the squared deviations around the line. This paper presents a new algorithm for such a regression problem. The procedure has at least two virtues: it is simple, and it produces useful information as a byproduct of the solution process. Empirical evidence is also presented on the differences in the values obtained with the two regression methods (i.e., mean-absolute-deviation and least-squares). The differences appear to be relatively slight, at least for well-diversified portfolios.
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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 18 (1971)
Issue (Month): 2 (October)
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