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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. 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.
  2. Garlappi, Lorenzo & Uppal, Raman & Wang, Tan, 2005. "Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach," CEPR Discussion Papers 5041, C.E.P.R. Discussion Papers.
  3. 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.
  4. 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.
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  6. Olivier Ledoit & Michael Wolf, 2003. "Honey, I Shrunk the Sample Covariance Matrix," Working Papers 92, Barcelona Graduate School of Economics.
  7. Viceira, Luis & Campbell, John, 2001. "Who Should Buy Long-Term Bonds?," Scholarly Articles 3128709, Harvard University Department of Economics.
  8. 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.
  9. Lubos Pastor & Robert F. Stambaugh, . "Comparing Asset Pricing Models: An Investment Perspective," Rodney L. White Center for Financial Research Working Papers 16-99, Wharton School Rodney L. White Center for Financial Research.
  10. Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-78, July.
  11. 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," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 315-42.
  12. A. CRAIG MacKINLAY & LUBOŠ PÁSTOR, . "Asset Pricing Models: Implications for Expected Returns and Portfolio Selection," CRSP working papers 510, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  13. 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.
  14. 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.
  15. 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.
  16. Robert C. Merton, 1980. "On Estimating the Expected Return on the Market: An Exploratory Investigation," NBER Working Papers 0444, National Bureau of Economic Research, Inc.
  17. John Y. Campbell & Luis M. Viceira, 1996. "Consumption and Portfolio Decisions When Expected Returns are Time Varying," NBER Working Papers 5857, National Bureau of Economic Research, Inc.
  18. Barry, Christopher B, 1974. "Portfolio Analysis under Uncertain Means, Variances, and Covariances," Journal of Finance, American Finance Association, vol. 29(2), pages 515-22, May.
  19. Louis K.C. Chan & Jason Karceski & Josef Lakonishok, 1999. "On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model," NBER Working Papers 7039, National Bureau of Economic Research, Inc.
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