Least Squares Predictions and Mean-Variance Analysis
AbstractWe compare the Sharpe rations of investment funds which combine one riskless and one risky asset following: i) timing strategies which forecast excess returns using simple regressions; ii) a strategy which uses multiple regression instead; and iii) a passive allocation which combines the funds in i) with constant weightings. We show that iii) dominates i) and ii), as it implicitly uses the linear forecasting rule that maximizes the Sharpe ratio of actively traded portfolios, but the relative ranking of i) and ii) is generally unclear. We also discuss under what circumstances the performance of ii) and iii) coincides.
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp312.
Date of creation: Jan 1999
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Web page: http://www.lse.ac.uk/fmg/
Other versions of this item:
- Enrique Sentana, 2005. "Least Squares Predictions and Mean-Variance Analysis," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(1), pages 56-78.
- Sentana, E., 1997. "Least Squares Predictions and Mean-Variance Analysis," Papers 9711, Centro de Estudios Monetarios Y Financieros-.
- Sentana, Enrique, 1999. "Least Squares Predictions and Mean-Variance Analysis," CEPR Discussion Papers 2088, C.E.P.R. Discussion Papers.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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