IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v12y1977i04p669-669_02.html
   My bibliography  Save this article

Abstract: The Effect of Limited Information and Estimation Risk on Optimal Portfolio Diversification

Author

Listed:
  • Klein, Roger W.
  • Bawa, Vijay S.

Abstract

This paper analyzes the effect of limited information and estimation risk on optimal portfolio choice when the joint probability distribution of security returns is multivariate normal and the underlying parameters (means and variance-covariance matrix) are unknown. We first consider the case of limited, but sufficient information (the number of observations per security exceeds the number of securities or the prior distribution of the underlying parameters is “sufficiently†informative). We show that for a general family of conjugate priors, the admissible set of portfolios, taking estimation risk into account, may be obtained by the traditional mean-variance analysis. As a result of estimation risk the optimal portfolio choice differs from that obtained by traditional analysis.

Suggested Citation

  • Klein, Roger W. & Bawa, Vijay S., 1977. "Abstract: The Effect of Limited Information and Estimation Risk on Optimal Portfolio Diversification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 669-669, November.
  • Handle: RePEc:cup:jfinqa:v:12:y:1977:i:04:p:669-669_02
    as

    Download full text from publisher

    File URL: https://www.cambridge.org/core/product/identifier/S0022109000023516/type/journal_article
    File Function: link to article abstract page
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chung, Richard & Kryzanowski, Lawrence, 2001. "Tests of investor cognizance using earnings forecasts of North American analysts," International Review of Economics & Finance, Elsevier, vol. 10(2), pages 187-204.
    2. Sergio H. Lence & Dermot J. Hayes, 1994. "The Empirical Minimum-Variance Hedge," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(1), pages 94-104.
    3. Robert M. Hull & George E. Pinches, 1995. "Firm Size and the Information Content of Over-the-Counter Common Stock Offerings," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 4(1), pages 31-55, Spring.
    4. Frankfurter, George M. & Phillips, Herbert E., 1996. "Normative implications of equilibrium models: Homogeneous expectations and other artificialities," Journal of Economic Behavior & Organization, Elsevier, vol. 31(1), pages 67-83, October.
    5. Jeffrey H. Harris & Shawn Mankad & Celso Brunetti, 2018. "Bank Holdings and Systemic Risk," Finance and Economics Discussion Series 2018-063, Board of Governors of the Federal Reserve System (U.S.), revised 04 Sep 2018.
    6. Stambaugh, Robert F., 1997. "Analyzing investments whose histories differ in length," Journal of Financial Economics, Elsevier, vol. 45(3), pages 285-331, September.
    7. Clarkson, Peter M. & Satterly, Amanda, 1997. "Australian evidence on the pricing of estimation risk," Pacific-Basin Finance Journal, Elsevier, vol. 5(3), pages 281-299, July.
    8. Hatemi-J, Abdulnasser & El-Khatib, Youssef, 2015. "Portfolio selection: An alternative approach," Economics Letters, Elsevier, vol. 135(C), pages 141-143.
    9. Abdulnasser Hatemi-J & Mohamed Ali Hajji & Youssef El-Khatib, 2019. "Exact Solution for the Portfolio Diversification Problem Based on Maximizing the Risk Adjusted Return," Papers 1903.01082, arXiv.org.
    10. Lam, Swee-Sum & Du, Jing, 2004. "Information asymmetry and estimation risk: Preliminary evidence from Chinese equity markets," Pacific-Basin Finance Journal, Elsevier, vol. 12(3), pages 311-331, June.
    11. D.J. Johnstone, 2015. "Information and the Cost of Capital in a Mean-Variance Efficient Market," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(1-2), pages 79-100, January.
    12. Thierry Post, 2001. "Performance Evaluation in Stochastic Environments Using Mean-Variance Data Envelopment Analysis," Operations Research, INFORMS, vol. 49(2), pages 281-292, April.
    13. Steven A. Dennis & Ian G. Sharpe, 2005. "Firm Size Dependence in the Determinants of Bank Term Loan Maturity," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(1-2), pages 31-64.
    14. Mark Grinblatt & Juhani T. Linnainmaa, 2011. "Jensen's Inequality, Parameter Uncertainty, and Multi-period Investment," Review of Asset Pricing Studies, Oxford University Press, vol. 1(1), pages 1-34.
    15. George M. Frankfurter & Christopher G. Lamoureux, 1989. "Estimation And Selection Bias In Mean-Variance Portfolio Selection," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 12(2), pages 173-181, June.
    16. Shane A. Corwin & Jay F. Coughenour, 2008. "Limited Attention and the Allocation of Effort in Securities Trading," Journal of Finance, American Finance Association, vol. 63(6), pages 3031-3067, December.
    17. Albert Eddy & Bruce Seifert, 1988. "Firm Size And Dividend Announcements," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 11(4), pages 295-302, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:12:y:1977:i:04:p:669-669_02. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters). General contact details of provider: https://www.cambridge.org/jfq .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.