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Market volatility, optimal portfolios and naive asset allocations

  • Loriana Pelizzon

    ()

    (Department of Economics, University Of Venice Cà Foscari)

  • Massimiliano Caporin

This paper investigates the impact of a financial turmoil on the performances of traditional, and naive, asset allocation strategies. We compare over a long time span (lasting for the last 60 years) the 1/N portfolio with mean-variance optimal portfolio strategies. Our analyses consider several datasets, and different approaches for the estimation of expected returns, starting from simple historical moments to the use of predictable variables, mean reversion or both. By employing rolling estimation approaches and robust Sharpe ratio testing we determine if during different market volatility states calibrated portfolios perform better than optimally determined allocations.

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File URL: http://www.unive.it/media/allegato/DIP/Economia/Working_papers/Working_papers_2012/WP_DSE_caporin_pelizzon_08_12.pdf
File Function: First version, 2011
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Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2012_08.

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Length: 17
Date of creation: 2012
Date of revision:
Publication status: forthcoming in
Handle: RePEc:ven:wpaper:2012_08
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Web page: http://www.unive.it/dip.economia
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  1. Lorenzo Garlappi & Raman Uppal & Tan Wang, 2007. "Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach," Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 41-81, January.
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  3. A. Craig MacKinlay & Lubos Pástor, . "Asset Pricing Models: Implications for Expected Returns and Portfolio Selection," Rodney L. White Center for Financial Research Working Papers 19-98, Wharton School Rodney L. White Center for Financial Research.
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  6. LuisM. Viceira & John Y. Campbell, 2001. "Who Should Buy Long-Term Bonds?," American Economic Review, American Economic Association, vol. 91(1), pages 99-127, March.
  7. Lubos Pastor & Robert F. Stambaugh, 1999. "Comparing Asset Pricing Models: An Investment Perspective," NBER Working Papers 7284, National Bureau of Economic Research, Inc.
  8. Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-78, July.
  9. Green, R.C. & Hollifield, B., 1990. "When Will Mean-Variance Efficient Portfolios Be Well Diversified?," GSIA Working Papers 1990-12, Carnegie Mellon University, Tepper School of Business.
  10. John Y. Campbell & Luis M. Viceira, 1999. "Consumption And Portfolio Decisions When Expected Returns Are Time Varying," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 433-495, May.
  11. Olivier Ledoit & Michael Wolf, 2003. "Honey, I shrunk the sample covariance matrix," Economics Working Papers 691, Department of Economics and Business, Universitat Pompeu Fabra.
  12. Lubo Pástor, . "Portfolio Selection and Asset Pricing Models," CRSP working papers 356, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  13. Ravi Jagannathan & Tongshu Ma, 2002. "Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps," NBER Working Papers 8922, National Bureau of Economic Research, Inc.
  14. Victor DeMiguel & Lorenzo Garlappi & Francisco J. Nogales & Raman Uppal, 2009. "A Generalized Approach to Portfolio Optimization: Improving Performance by Constraining Portfolio Norms," Management Science, INFORMS, vol. 55(5), pages 798-812, May.
  15. 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.
  16. Best, Michael J. & Grauer, Robert R., 1992. "Positively Weighted Minimum-Variance Portfolios and the Structure of Asset Expected Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(04), pages 513-537, December.
  17. Jorion, Philippe, 1986. "Bayes-Stein Estimation for Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(03), pages 279-292, September.
  18. Chan, Louis K C & Karceski, Jason & Lakonishok, Josef, 1999. "On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 937-74.
  19. Oliver Ledoit & Michael Wolf, 2008. "Robust Performance Hypothesis Testing with the Sharpe Ratio," IEW - Working Papers 320, Institute for Empirical Research in Economics - University of Zurich.
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