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Mean-Variance versus 1/N: What if we can forecast? (Updated 22nd December 2013)

Author

Listed:
  • Allen, D.
  • Lizieri, C.
  • Satchell, S.

Abstract

Mean-variance optimisation has been roundly criticised by financial economists and practitioners alike, leading many to advocate a simple 1/N weighting heuristic. We investigate the performance of the Markowitz technique conditional on investor forecasting ability. Using a novel analytical approach, we demonstrate that investors with a modicum of forecasting ability can employ mean-variance to significantly increase their ex ante utility, outperforming the 1/N rule.

Suggested Citation

  • Allen, D. & Lizieri, C. & Satchell, S., 2012. "Mean-Variance versus 1/N: What if we can forecast? (Updated 22nd December 2013)," Cambridge Working Papers in Economics 1244, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1244
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    File URL: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1244.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Portfolio Choice; Investment Decisions; Financial Forecasting and Simulation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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