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Combining the minimum-variance and equally-weighted portfolios: Can portfolio performance be improved?

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  • Jiang, Chonghui
  • Du, Jiangze
  • An, Yunbi

Abstract

It is documented in the literature that due to estimation errors, mean-variance efficient portfolios deliver no higher out-of-sample Sharpe ratios than does the naïve equally-weighted portfolio (EWP). This paper demonstrates how the out-of-sample performance of the minimum-variance portfolio (MVP) can be improved in the presence of estimation errors by combining the MVP and EWP. Our results indicate that an appropriate combination of the MVP and EWP can enhance Sharpe ratios under any scenarios considered, and can also reduce the portfolio risk if short-selling is allowed. However, the combination strategy is not able to generate a lower risk level than the MVP when a short-selling restriction is imposed. We find that the optimal combination coefficient depends on the factors that greatly impact estimation errors in the MVP, including sample size, estimation method, no-short-selling restriction, and length of the out-of-sample period under consideration.

Suggested Citation

  • Jiang, Chonghui & Du, Jiangze & An, Yunbi, 2019. "Combining the minimum-variance and equally-weighted portfolios: Can portfolio performance be improved?," Economic Modelling, Elsevier, vol. 80(C), pages 260-274.
    • Handle: RePEc:eee:ecmode:v:80:y:2019:i:c:p:260-274
    DOI: 10.1016/j.econmod.2018.11.012
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    Citations

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    Cited by:

    1. Kaiqiang An & Guiyu Zhao & Jinjun Li & Jingsong Tian & Lihua Wang & Liang Xian & Chen Chen, 2023. "Best-Case Scenario Robust Portfolio: Evidence from China Stock Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(2), pages 297-322, June.
    2. Maciel, Leandro, 2021. "A new approach to portfolio management in the Brazilian equity market: Does assets efficiency level improve performance?," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 38-56.
    3. Ben Abdelaziz, Fouad & Chibane, Messaoud, 2023. "Portfolio optimization in the presence of tail correlation," Economic Modelling, Elsevier, vol. 122(C).
    4. Caldeira, João F. & Santos, André A.P. & Torrent, Hudson S., 2023. "Semiparametric portfolios: Improving portfolio performance by exploiting non-linearities in firm characteristics," Economic Modelling, Elsevier, vol. 122(C).
    5. Jiang, Chonghui & Du, Jiangze & An, Yunbi & Zhang, Jinqing, 2021. "Factor tracking: A new smart beta strategy that outperforms naïve diversification," Economic Modelling, Elsevier, vol. 96(C), pages 396-408.

    More about this item

    Keywords

    Portfolio performance; Estimation errors; Minimum-variance portfolio; Equally-weighted portfolio;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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