What is the Opportunity Cost of Mean-Variance Investment Strategies?
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.
Volume (Year): 39 (1993)
Issue (Month): 5 (May)
|Contact details of provider:|| Postal: |
Web page: http://www.informs.org/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:39:y:1993:i:5:p:578-587. 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: (Mirko Janc)
If references are entirely missing, you can add them using this form.