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On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model Author info | Abstract | Publisher info | Download info | Related research | Statistics Louis K.C. Chan
Jason Karceski
Josef Lakonishok
We evaluate the performance of different models for the covariance structure of stock returns, focusing on their use for optimal portfolio selection. Comparisons are based on forecasts of future covariances as well as the out-of-sample volatility of optimized portfolios from each model. A few factors capture the general covariance structure but adding more factors does not improve forecast power. Portfolio optimization helps for risk control, but the different covariance models yield similar results. Using a tracking error volatility criterion, larger differences appear, with particularly favorable results for a heuristic approach based on matching the benchmark's attributes.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
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Date of creation: Mar 1999Date of revision:
Handle: RePEc:nbr:nberwo:7039Note: APContact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A. Phone: 617-868-3900 Email: Web page: http://www.nber.org More information through EDIRC
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Find related papers by JEL classification: G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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