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What is the Opportunity Cost of Mean-Variance Investment Strategies?

Author

Listed:
  • Yusif Simaan

    (Graduate School of Business Administration, Fordham University, 113 West 60th Street, New York, New York 10023)

Abstract

An analytical framework is set up to evaluate the foregone opportunity cost of mean-variance investment strategies. A parametric structure of the joint distribution of security returns, for which mean-variance investment strategy is suboptimal, is specified. For all constant absolute risk-aversion investors, the optimal strategy, its corresponding mean-variance alternative, and the foregone opportunity cost of mean-variance investment strategy are analytically derived and operationalized empirically. When the investor's opportunity set includes the riskless asset, the premium to replace the mean-variance investment strategy by its optimal one does not exceed 0.05 cents on an invested dollar regardless of the investor's risk aversion. When the riskless asset is denied, the opportunity costs of mean-variance investment strategies increase with the degree of risk aversion.

Suggested Citation

  • Yusif Simaan, 1993. "What is the Opportunity Cost of Mean-Variance Investment Strategies?," Management Science, INFORMS, vol. 39(5), pages 578-587, May.
  • Handle: RePEc:inm:ormnsc:v:39:y:1993:i:5:p:578-587
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    File URL: http://dx.doi.org/10.1287/mnsc.39.5.578
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Markowitz, Harry, 2014. "Mean–variance approximations to expected utility," European Journal of Operational Research, Elsevier, vol. 234(2), pages 346-355.
    2. Simaan, Yusif, 2014. "The opportunity cost of mean–variance choice under estimation risk," European Journal of Operational Research, Elsevier, vol. 234(2), pages 382-391.
    3. repec:eee:revfin:v:33:y:2017:i:c:p:41-54 is not listed on IDEAS
    4. Joseph R. Blasi & Douglas L. Kruse & Harry M. Markowitz, 2010. "Risk and Lack of Diversification under Employee Ownership and Shared Capitalism," NBER Chapters,in: Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options, pages 105-136 National Bureau of Economic Research, Inc.
    5. repec:eee:empfin:v:44:y:2017:i:c:p:250-269 is not listed on IDEAS
    6. repec:spr:decfin:v:40:y:2017:i:1:d:10.1007_s10203-017-0201-0 is not listed on IDEAS
    7. Charoula Daskalaki & George Skiadopoulos & Nikolas Topaloglou, 2016. "Diversification Benefits of Commodities: A Stochastic Dominance Efficiency Approach," Working Papers 797, Queen Mary University of London, School of Economics and Finance.
    8. Cooper, W. W. & Lelas, V. & Sueyoshi, T., 1997. "Goal programming models and their duality relations for use in evaluating security portfolio and regression relations," European Journal of Operational Research, Elsevier, vol. 98(2), pages 431-443, April.
    9. Jin, Hyun J. & Koo, Won W., 2006. "Offshore hedging strategy of Japan-based wheat traders under multiple sources of risk and hedging costs," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 220-236, March.
    10. Alexandros Kostakis & Nikolaos Panigirtzoglou & George Skiadopoulos, 2011. "Market Timing with Option-Implied Distributions: A Forward-Looking Approach," Management Science, INFORMS, pages 1231-1249.
    11. Hasan, Iftekhar & Simaan, Yusif, 2000. "A rational explanation for home country bias," Journal of International Money and Finance, Elsevier, vol. 19(3), pages 331-361, June.
    12. Christodoulakis, George & Peel, David, 2006. "The relationship between expected utility and higher moments for distributions captured by the Gram-Charlier class," Finance Research Letters, Elsevier, vol. 3(4), pages 273-276, December.
    13. Levy, Haim & Simaan, Yusif, 2016. "More possessions, more worry," European Journal of Operational Research, Elsevier, vol. 255(3), pages 893-902.
    14. Frechette, Darren L., 2000. "Hedging With Futures And Options: A Demand Systems Approach," 2000 Conference, April 17-18 2000, Chicago, Illinois 18941, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.

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