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Market volatility, optimal portfolios and naive asset allocations

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  • Loriana Pelizzon

    ()
    (Department of Economics, University Of Venice Cà Foscari)

  • Massimiliano Caporin

Abstract

This paper investigates the impact of a financial turmoil on the performances of traditional, and naive, asset allocation strategies. We compare over a long time span (lasting for the last 60 years) the 1/N portfolio with mean-variance optimal portfolio strategies. Our analyses consider several datasets, and different approaches for the estimation of expected returns, starting from simple historical moments to the use of predictable variables, mean reversion or both. By employing rolling estimation approaches and robust Sharpe ratio testing we determine if during different market volatility states calibrated portfolios perform better than optimally determined allocations.

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File URL: http://www.unive.it/media/allegato/DIP/Economia/Working_papers/Working_papers_2012/WP_DSE_caporin_pelizzon_08_12.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2012_08.

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Length: 17
Date of creation: 2012
Date of revision:
Publication status: forthcoming in
Handle: RePEc:ven:wpaper:2012_08

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Keywords: Mean reversion; strategy preference; 1/N; predictability; testing Sharpe equivalence;

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  17. Louis K.C. Chan & Jason Karceski & Josef Lakonishok, 1999. "On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model," NBER Working Papers 7039, National Bureau of Economic Research, Inc.
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