Least Squares Predictions and Mean-Variance Analysis
We compare the Sharpe rations of investment funds which combine one riskless and one risky asset following: i) timing strategies which forecast excess returns using simple regressions; ii) a strategy which uses multiple regression instead; and iii) a passive allocation which combines the funds in i) with constant weightings. We show that iii) dominates i) and ii), as it implicitly uses the linear forecasting rule that maximizes the Sharpe ratio of actively traded portfolios, but the relative ranking of i) and ii) is generally unclear. We also discuss under what circumstances the performance of ii) and iii) coincides.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hansen, Lars Peter & Richard, Scott F, 1987. "The Role of Conditioning Information in Deducing Testable," Econometrica, Econometric Society, vol. 55(3), pages 587-613, May.
- Weiss, Andrew A, 1996. "Estimating Time Series Models Using the Relevant Cost Function," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 539-560, Sept.-Oct.
- Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
- Chen, Zhiwu & Knez, Peter J, 1996.
"Portfolio Performance Measurement: Theory and Applications,"
Review of Financial Studies,
Society for Financial Studies, vol. 9(2), pages 511-555.
- Peter J. Knez & Zhiwu Chen, 1998. "Portfolio Performance Measurement: Theory and Applications," Yale School of Management Working Papers ysm48, Yale School of Management.
- Arellano, Manuel, 1989. "On the efficient estimation of simultaneous equations with covariance restrictions," Journal of Econometrics, Elsevier, vol. 42(2), pages 247-265, October.
- Admati, Anat R & Pfleiderer, Paul, 1990. "Direct and Indirect Sale of Information," Econometrica, Econometric Society, vol. 58(4), pages 901-928, July. Full references (including those not matched with items on IDEAS)