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Mean-Absolute-Deviation Characteristic Lines for Securities and Portfolios

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Author Info

  • William F. Sharpe

    (Stanford University)

Abstract

The 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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File URL: http://dx.doi.org/10.1287/mnsc.18.2.B1
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 18 (1971)
Issue (Month): 2 (October)
Pages: B1-B13

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Handle: RePEc:inm:ormnsc:v:18:y:1971:i:2:p:b1-b13

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Cited by:
  1. Giloni, Avi & Simonoff, Jeffrey S. & Sengupta, Bhaskar, 2006. "Robust weighted LAD regression," Computational Statistics & Data Analysis, Elsevier, vol. 50(11), pages 3124-3140, July.
  2. Mansini, Renata & Ogryczak, Wlodzimierz & Speranza, M. Grazia, 2014. "Twenty years of linear programming based portfolio optimization," European Journal of Operational Research, Elsevier, vol. 234(2), pages 518-535.
  3. W. Michalowski & W. Ogryczak, 1998. "Extending the MAD Portfolio Optimization Model to Incorporate Downside Risk Aversion," Working Papers ir98041, International Institute for Applied Systems Analysis.

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