IDEAS home Printed from https://ideas.repec.org/a/wly/riskan/v35y2015i12p2172-2182.html
   My bibliography  Save this article

Risk‐Based Sampling: I Don't Want to Weight in Vain

Author

Listed:
  • Mark R. Powell

Abstract

Recently, there has been considerable interest in developing risk‐based sampling for food safety and animal and plant health for efficient allocation of inspection and surveillance resources. The problem of risk‐based sampling allocation presents a challenge similar to financial portfolio analysis. Markowitz (1952) laid the foundation for modern portfolio theory based on mean‐variance optimization. However, a persistent challenge in implementing portfolio optimization is the problem of estimation error, leading to false “optimal” portfolios and unstable asset weights. In some cases, portfolio diversification based on simple heuristics (e.g., equal allocation) has better out‐of‐sample performance than complex portfolio optimization methods due to estimation uncertainty. Even for portfolios with a modest number of assets, the estimation window required for true optimization may imply an implausibly long stationary period. The implications for risk‐based sampling are illustrated by a simple simulation model of lot inspection for a small, heterogeneous group of producers.

Suggested Citation

  • Mark R. Powell, 2015. "Risk‐Based Sampling: I Don't Want to Weight in Vain," Risk Analysis, John Wiley & Sons, vol. 35(12), pages 2172-2182, December.
    • Handle: RePEc:wly:riskan:v:35:y:2015:i:12:p:2172-2182
    DOI: 10.1111/risa.12415
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/risa.12415
    Download Restriction: no
    File URL: https://libkey.io/10.1111/risa.12415?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Victor DeMiguel & Lorenzo Garlappi & Raman Uppal, 2009. "Optimal Versus Naive Diversification: How Inefficient is the 1-N Portfolio Strategy?," The Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1915-1953, May.
    2. Frankfurter, George M. & Phillips, Herbert E. & Seagle, John P., 1971. "Portfolio Selection: The Effects of Uncertain Means, Variances, and Covariances," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 6(5), pages 1251-1262, December.
    3. Barry, Christopher B, 1974. "Portfolio Analysis under Uncertain Means, Variances, and Covariances," Journal of Finance, American Finance Association, vol. 29(2), pages 515-522, May.
    4. Bloomfield, Ted & Leftwich, Richard & Long, John Jr., 1977. "Portfolio strategies and performance," Journal of Financial Economics, Elsevier, vol. 5(2), pages 201-218, November.
    5. Andrew W. Lo & Mark T. Mueller, 2010. "WARNING: Physics Envy May Be Hazardous To Your Wealth!," Papers 1003.2688, arXiv.org, revised Mar 2010.
    6. Frankel, Jeffrey & Engel, Charles M., 1984. "Do asset-demand functions optimize over the mean and variance of real returns? A six-currency test," Journal of International Economics, Elsevier, vol. 17(3-4), pages 309-323, November.
    7. Pflug, Georg Ch. & Pichler, Alois & Wozabal, David, 2012. "The 1/N investment strategy is optimal under high model ambiguity," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 410-417.
    8. Thomas Schmelzer & Raphael Hauser, 2013. "Seven Sins in Portfolio Optimization," Papers 1310.3396, arXiv.org.
    9. Andrew G. Haldane & Robert M. May, 2011. "Systemic risk in banking ecosystems," Nature, Nature, vol. 469(7330), pages 351-355, January.
    10. Lorenzo Garlappi & Raman Uppal & Tan Wang, 2007. "Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach," The Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 41-81, January.
    11. Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-278, July.
    12. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
    13. Arinaminpathy, Nimalan & Kapadia, Sujit & May, Robert, 2012. "Size and complexity in model financial systems," Bank of England working papers 465, Bank of England.
    14. Robert M. May & Simon A. Levin & George Sugihara, 2008. "Ecology for bankers," Nature, Nature, vol. 451(7181), pages 893-894, February.
    15. Green, Richard C & Hollifield, Burton, 1992. "When Will Mean-Variance Efficient Portfolios Be Well Diversified?," Journal of Finance, American Finance Association, vol. 47(5), pages 1785-1809, December.
    16. Best, Michael J & Grauer, Robert R, 1991. "On the Sensitivity of Mean-Variance-Efficient Portfolios to Changes in Asset Means: Some Analytical and Computational Results," The Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 315-342.
    17. Gregory Connor & Lisa R. Goldberg & Robert A. Korajczyk, 2010. "Portfolio Risk Analysis," Economics Books, Princeton University Press, edition 1, number 9224.
    18. Jiang, Chonghui & Ma, Yongkai & An, Yunbi, 2010. "An analysis of portfolio selection with background risk," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 3055-3060, December.
    19. H Peyton Young & Paul Glasserman, 2013. "How Likely is Contagion in Financial Networks?," Economics Series Working Papers 642, University of Oxford, Department of Economics.
    20. Merton, Robert C., 1980. "On estimating the expected return on the market : An exploratory investigation," Journal of Financial Economics, Elsevier, vol. 8(4), pages 323-361, December.
    21. Barry, Christopher B. & Winkler, Robert L., 1976. "Nonstationarity and Portfolio Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 11(2), pages 217-235, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yan, Cheng & Zhang, Huazhu, 2017. "Mean-variance versus naïve diversification: The role of mispricing," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 61-81.
    2. Lassance, Nathan & Vanderveken, Rodolphe & Vrins, Frédéric, 2022. "On the optimal combination of naive and mean-variance portfolio strategies," LIDAM Discussion Papers LFIN 2022006, Université catholique de Louvain, Louvain Finance (LFIN).
    3. James DiLellio, 2015. "A Kalman filter control technique in mean-variance portfolio management," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(2), pages 235-261, April.
    4. Meade, N. & Beasley, J.E. & Adcock, C.J., 2021. "Quantitative portfolio selection: Using density forecasting to find consistent portfolios," European Journal of Operational Research, Elsevier, vol. 288(3), pages 1053-1067.
    5. Cheng Yan & Ji Yan, 2021. "Optimal and naive diversification in an emerging market: Evidence from China's A‐shares market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3740-3758, July.
    6. Loriana Pelizzon & Massimiliano Caporin, 2012. "Market volatility, optimal portfolios and naive asset allocations," Working Papers 2012_08, Department of Economics, University of Venice "Ca' Foscari".
    7. Kellerer, Belinda, 2019. "Portfolio Optimization and Ambiguity Aversion," Junior Management Science (JUMS), Junior Management Science e. V., vol. 4(3), pages 305-338.
    8. Hwang, Inchang & Xu, Simon & In, Francis, 2018. "Naive versus optimal diversification: Tail risk and performance," European Journal of Operational Research, Elsevier, vol. 265(1), pages 372-388.
    9. Mishra, Anil V., 2016. "Foreign bias in Australian-domiciled mutual fund holdings," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 101-123.
    10. Mishra, Anil V., 2015. "Measures of equity home bias puzzle," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 293-312.
    11. Kolm, Petter N. & Tütüncü, Reha & Fabozzi, Frank J., 2014. "60 Years of portfolio optimization: Practical challenges and current trends," European Journal of Operational Research, Elsevier, vol. 234(2), pages 356-371.
    12. Carroll, Rachael & Conlon, Thomas & Cotter, John & Salvador, Enrique, 2017. "Asset allocation with correlation: A composite trade-off," European Journal of Operational Research, Elsevier, vol. 262(3), pages 1164-1180.
    13. Erindi Allaj, 2020. "The Black–Litterman model and views from a reverse optimization procedure: an out-of-sample performance evaluation," Computational Management Science, Springer, vol. 17(3), pages 465-492, October.
    14. Wolff, Dominik & Bessler, Wolfgang & Opfer, Heiko, 2012. "Multi-Asset Portfolio Optimization and Out-of-Sample Performance: An Evaluation of Black-Litterman, Mean Variance and Naïve Diversification Approaches," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62020, Verein für Socialpolitik / German Economic Association.
    15. Hsu, Po-Hsuan & Han, Qiheng & Wu, Wensheng & Cao, Zhiguang, 2018. "Asset allocation strategies, data snooping, and the 1 / N rule," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 257-269.
    16. Behr, Patrick & Guettler, Andre & Miebs, Felix, 2013. "On portfolio optimization: Imposing the right constraints," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1232-1242.
    17. Johannes Bock, 2018. "An updated review of (sub-)optimal diversification models," Papers 1811.08255, arXiv.org.
    18. Mishra, Anil V., 2017. "Foreign bias in Australia's international equity holdings," Review of Financial Economics, Elsevier, vol. 33(C), pages 41-54.
    19. Grauer, Robert R. & Hakansson, Nils H., 1995. "Stein and CAPM estimators of the means in asset allocation," International Review of Financial Analysis, Elsevier, vol. 4(1), pages 35-66.
    20. Behr, Patrick & Guettler, Andre & Truebenbach, Fabian, 2012. "Using industry momentum to improve portfolio performance," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1414-1423.

    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:wly:riskan:v:35:y:2015:i:12:p:2172-2182. See general information about how to correct material in RePEc.

    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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1111/(ISSN)1539-6924 .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.