An analytical investigation of estimators for expected asset returns from the perspective of optimal asset allocation
AbstractIn the present work I derive the risk functions of 5 standard estimators for expected asset returns which are frequently advocated in the literature, viz the sample mean vector, the James-Stein and Bayes-Stein estimator, the minimum-variance estimator, and the CAPM estimator. I resolve the question why it is meaningful to study the risk function in the context of optimal asset allocation. Further, I derive the quantities which determine the risks of the different expected return estimators and show which estimators are preferable with respect to optimal asset allocation. Finally, I discuss the question whether it pays to strive for the optimal portfolio by using time series information. It turns out that in many practical situations it is better to renounce parameter estimation altogether and pursue some trivial strategy such as the totally risk-free investment. --
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Cologne, Department for Economic and Social Statistics in its series Discussion Papers in Statistics and Econometrics with number 1/10.
Date of creation: 2010
Date of revision:
Contact details of provider:
Postal: Albertus Magnus Platz, 50923 Köln
Phone: 0221 / 470 5607
Fax: 0221 / 470 5179
Web page: http://www.wisostat.uni-koeln.de/Englisch/index_en.html
More information through EDIRC
Asset allocation; Bayes-Stein estimator; CAPM estimator; James-Stein estimator; Minimum-variance estimator; Naive diversification; Out-ofsample performance; Risk function; Shrinkage estimation;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alexander Kempf & Christoph Memmel, 2006. "Estimating the global Minimum Variance Portfolio," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 58(4), pages 332-348, October.
- Gabriel Frahm & Christoph Memmel, 2010.
"Dominating Estimators for Minimum-Variance Portfolios,"
- Frahm, Gabriel & Memmel, Christoph, 2010. "Dominating estimators for minimum-variance portfolios," Journal of Econometrics, Elsevier, vol. 159(2), pages 289-302, December.
- Gabriel Frahm & Christoph Memmel, 2010. "Dominating Estimators for Minimum-Variance Portfolios," Post-Print peer-00741629, HAL.
- Elroy Dimson & Paul Marsh & Mike Staunton, 2003. "Global Evidence On The Equity Risk Premium," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(4), pages 27-38.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).
If references are entirely missing, you can add them using this form.