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

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Author Info

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

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.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1244.

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Date of creation: 19 Oct 2012
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Handle: RePEc:cam:camdae:1244

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Web page: http://www.econ.cam.ac.uk/index.htm

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

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